Automobiles
Race of Unequals
July 10, 2017
Chirag Shah
+91 22 6623 3367
[email protected]
Karthik Subramaniam
+91 22 6620 3156
[email protected]
Edelweiss Securities Limited
Automobiles
Executive Summary
The domestic auto sector is in a sweet spot, riding anticipated
cyclical recovery and rising structural tailwinds. More
importantly, few players have established a decisive lead and
are set to further fortify their position over the next 3-5 years.
Our category-wise deep dive analysis makes us believe that:
(a) Maruti Suzuki’s (MSIL) dominance in PVs will rise further
(Click here for
reaping benefits of the widening gap versus peers on all fronts
video clip)
– operational, financial and products; (b) Eicher Motors (EIM)
and Honda Motorcycle (HMSI) are striding a multi-year demand up-cycle
(shift in preference plus extremely low penetration) in >250cc motorcycles
and scooters respectively, owing to their first-mover advantage; and (c) Ashok
Leyland (AL) may dethrone market leader Tata Motors (TTMT) in M&HCVs.
That these gains are backed by rising profitability & cash flows and the sector
is an early cycle play, should only raise their valuations. We believe that the
traditional auto sector valuation framework is undergoing a change,
reflecting business dynamics (growth and cash flows), individual company
domination and prospects, and drawing parallels with consumer facing
businesses across sectors (from banking to commodities). We believe, this
convergence of cycle, structure and businesses will drive AL, EIM and MSIL to
newer highs. We advise investors to hop on for the joy ride.
Passenger vehicles: MSIL widening gap with peers
Today, MSIL is a virtual monopoly, a trend we see only consolidating over the next 3-5 years.
While the company has done a catch up on the premiumisation band wagon very well,
competition has gone back to the drawing board to recalibrate the strategy (including
exiting domestic market). It has not only increased market share (~900bps in 5 years), but is
also expanding its dominance across other key areas—product launch cycle (2-3 launches
every year), distribution reach (trebling on a high base), margin and free cash flow cycle. We
detail these in the report. And, given the company’s obsession with customer satisfaction,
we do not see the scenario changing over the next few years.
2-wheelers: Early bird catches the worm
In 2W, we argue the ability to carve a new category is the sole success mantra, and once a
player achieves leadership, it’s difficult to dislodge him. At the current juncture, we see 2
categories that will drive industry growth - scooters and >250cc motorcycles. The key
drivers being shift in preference, lower penetration levels and emergence of women as key
demand influencers. Share of scooters can rise to at least 50% from 32% in FY17 at the cost
of commuter bikes; and (ii) >250cc motorcycles’ (~27% of premium motorcycles) share can
easily double driven by extremely low penetration levels (3/1,000 males versus 23/1,000
males for premium bikes and 15/1,000 people for cars). HMSI (market share at ~57%, up by
~900bps in past 5 years) in scooters and EIM (~95% market share) in >250cc motorcycles are
best placed to capitalise on this trend. While Royal Enfield (RE) stands out on its margin and
cash flow profile with ~31% and 12% (of sales) respectively, HMSI has improved its margin
and is now in striking distance of industry leader, both in terms of margins and market share.
1
Edelweiss Securities Limited
Automobiles
M&HCV: Challenger dethroning the leader?
In commercial vehicles (CVs), we perceive 3 structural trends: 1) demand shifting to higher
tonnage segments. Ashok Leyland (AL), with strong positioning in higher tonnage (>35T)
segment, will be key beneficiary; 2) leader in each sub-segment has lost market share and
we expect the trend to sustain; and 3) distribution reach continues to remain a vital cog (has
helped AL gain market share). In addition, industry is shifting from a pure after-sales-led
model to solutions-led industry as technology, safety and comfort gain prominence– this
too should play to AL’s favour.
Sector outlook and valuations: Stepping onto the next level
In our view, the auto sector has re-rated (in line with broader indices), and in the historical
valuation framework, appears expensive for select stocks. We believe, the valuation
framework is in the midst of a step-up— a mix of cyclical, structural and company-specific
drivers. This, as we argue below, suggests one should look at further rerating ahead rather
than compare with the less relevant historic average.
2
•
Cyclical recovery: Empirical evidence indicates that the sector is an early cycle play with
maximum stock outperformance in the initial phase of economic recovery (before
volume recovery sets in). Anecdotal data indicates the likelihood of strong cyclical
demand as well as margins (upwards of 200bps) in the 2 years following the trough GDP
year. We argue there is a cyclical step-up ahead – it may not necessarily be as sharp as
previous bounces (and we factor in only moderate volume increases). We believe, the
recovery could be more pronounced for MHCVs (than PV & 2W demand). The topdown picture (economic and interest rate cycle along with implementation of reforms overloading ban, road addition, GST, etc) suggests we are relatively close.
•
Structurally higher margin band: While there is a cyclical element to margins - there
has been sustained step-up in the sector margins and cash flows in past few cycles. We
believe, these are now more structural. Just as this has raised the sector’s profitability,
we believe it will lend an impetus to valuation, going forward. For MSIL/EIM/AL, due to
their rising business positioning and dominance, re-rating will be higher.
•
Drawing parallels: The market, and other B2C businesses - The Indian market has rerated – is trading ~1SD above its mean, and while there can be debates on it, it does
raise the base framework. Various consumer facing businesses (from financials to
commodities) have re-rated even more aggressively, and consistently. For autos, the rerating is clearly visible in MSIL/EIM/HMCL. However, there exists further scope of rerating for MSIL/EIM, when one compares their industry dynamics and positioning with
other consumer facing businesses across sectors. A case in point is Asian Paints (APL),
which trades at ~45x 1 year forward PER. While there are some fundamental
differences (and we are not using APL as a benchmark), it’s worth noting that market
share and RoIC of MSIL/EIM are similar or better and revenue and EBIDT growth have
actually been stronger in past 4 years versus APL. That APL trades at almost 2x MSIL
and 1.5x EIM suggests that the valuation benchmarks for autos will be shifting and
more favourably and higher. A similar comparison with the consumer durables index
reiterates that MSIL and EIM’s revenue/EBITDA growth and RoIC are superior. Despite
this, valuations for MSIL and EIM are at a discount to the consumer durables index.
Edelweiss Securities Limited
Automobiles
•
Our stock picks: We believe AL offers value at current juncture, given uncertainty with
respect to top-down demand outlook. Given the strong free cash flow and market
share gain story, relative valuations imply limited downside. We also like EIM and MSIL
as structural stories for dominant positioning and opportunity size. Worth noting is that
AL with ~65% utilisation levels is well-geared for the cyclical upturn. However,
MSIL/EIM will face capacity constraints (and hence lose market share), if there is a
sharp cyclical recovery in demand.
Table 1: Leaders versus challengers – Different categories, different stories
Passenger vehicles
FY12
FY13
FY14
FY15
FY16
Volume market share (%)
Leader - MSIL
38.4
39.3
42.1
45.0
46.8
Challenger - Hyundai
14.8
14.3
15.2
16.2
17.4
EBITDA margins (%)
Leader - MSIL
7.1
9.7
11.6
13.0
15.4
Challenger - Hyundai
9.4
9.5
9.8
9.7
10.1
Two Wheelers
FY12
FY13
FY14
FY15
FY16
Volume market share (%)
Leader - HMCL
45.1
42.9
41.3
40.2
39.0
Challenger - HMSI
14.9
18.9
24.0
26.6
26.0
Challenger - RE
0.6
0.9
1.4
2.0
3.0
EBITDA margins (%)
Leader - HMCL
15.4
13.8
14.0
12.8
15.5
Challenger - HMSI
11.4
9.9
10.1
11.0
13.3
Challenger - RE
11.9
13.9
18.4
24.2
28.0
M&HCVs
FY12
FY13
FY14
FY15
FY16
Volume market share (%)
Leader - TTMT
59.3
53.8
54.9
54.6
51.9
Challenger - AL
23.3
26.2
25.8
28.5
32.7
EBITDA margins (%)
Leader - TTMT
7.8
4.3
(2.6)
(3.5)
5.5
Challenger - AL
10.2
7.0
1.7
7.6
11.9
PVs: Characterised by MSIL’s
dominance; expect dominance to
further rise
2Ws:- Being in the right place at
the right time is key. Scooters
(HMSI) and >250cc bikes (EIM)
represent multi-year growth
opportunities
M&HCVs: AL may dethrone
TTMT’s leadership in M&HCVs;
structural demand shift to higher
tonnage and expanding
distribution play to AL’s advantage
FY17
47.4
16.7
15.2
n/a
FY17
36.9
26.9
3.7
16.3
n/a
31.3
FY17
49.2
33.8
2.8
11.0
Source: SIAM, Edelweiss research
3
Edelweiss Securities Limited
Automobiles
Contents
Executive Summary .................................................................................................................. 1
At a Glance ............................................................................................................................... 5
Edelweiss versus Consensus .................................................................................................... 6
Volume Snapshot ..................................................................................................................... 7
Passenger Vehicles: MSIL Widening Gap With Peers ............................................................... 8
2 Wheelers: Early Bird Catches the Worm ............................................................................. 15
M&HCV: Challenger Dethroning the Leader? ........................................................................ 22
Sector Outlook and Valuations .............................................................................................. 29
Our Preferred Allocation in the Sector................................................................................... 36
Companies
Ashok Leyland ........................................................................................................................ 37
Bajaj Auto ............................................................................................................................... 45
Eicher Motors......................................................................................................................... 53
Hero MotoCorp ...................................................................................................................... 59
Mahindra & Mahindra ........................................................................................................... 67
Maruti Suzuki India ................................................................................................................ 75
Tata Motors............................................................................................................................ 83
4
Edelweiss Securities Limited
5
8,802
Maruti Suzuki
495
1,540
M&M + MVML
Tata Motors
3,967
Hero Motocorp
Bajaj Auto
34,543
2,957
Company
Ashok Leyland
Eicher Motors
Target
price
135
Financials (INR mn)
Growth (%)
EBITDA
Valuations
margins
EV / EBITDA
(%)
Reco
Revenue
EBITDA
Adj. PAT EPS (INR) Revenue EBITDA Adj. PAT
EPS
ROCE (%)
FCF
(x) P/E (x) P/B (x) ROE (%)
Buy
FY16 189,373
22,546
7,715
1.4
39.6 119.6
229.9
229.9
13.4
76.9
6.8
14.7
24.0
11.9
15,548
FY17 200,187
22,025
15,585
4.3
5.7
(2.3)
213.9
213.9
13.2
24.5
5.9
21.2
24.7
11.0
17,765
FY18E 241,260
24,777
14,547
5.1
20.5
12.5
18.9
18.9
11.4
20.6
5.2
22.6
27.9
10.3
22,917
FY19E 276,354
30,797
18,936
6.7
14.5
24.3
30.2
30.2
8.8
15.8
4.6
26.4
32.9
11.1
22,764
807,342
Hold
FY16 225,865
47,819
39,297
135.8
4.5
13.2
16.1
16.1
14.5
20.1
6.0
32.8
45.9
21.2
35,841
FY17 217,667
44,224
38,276
132.3
(3.6)
(7.5)
(2.6)
(2.6)
14.8
20.6
4.6
25.3
35.0
20.3
30,555
FY18E 249,974
52,311
44,800
154.8
14.8
18.3
17.0
17.0
12.0
17.6
4.2
24.9
35.1
20.9
36,365
FY19E 276,313
58,261
49,525
171.1
10.5
11.4
10.5
10.5
10.4
15.9
3.8
24.9
35.1
21.1
35,853
18,019
57.5
15.6
758,524
Buy
FY16 156,887
24,472
12,779
470.5
52.6
86.6
76.1
76.1
34.7
59.4
20.8
40.0
FY17
70,334
21,740
16,671
613.8
(47.3)
4.5
53.5
53.5
28.2
45.5
14.2
37.1
49.6
30.9
9,800
FY18E
93,806
30,621
23,597
868.8
33.4
40.9
41.5
41.5
20.5
32.1
10.4
37.3
49.6
32.6
17,215
FY19E 127,598
43,449
33,633 1,238.3
36.0
41.9
42.5
42.5
14.2
22.6
7.5
38.7
51.9
34.1
30,706
754,267
Hold
FY16 285,993
44,470
31,324
156.9
3.7
25.5
42.1
42.1
15.8
23.8
9.4
43.2
60.7
15.5
27,380
FY17 284,750
46,348
33,771
169.1
(0.4)
4.2
7.8
7.8
14.8
22.1
7.4
37.4
51.7
16.3
28,773
FY18E 318,177
51,498
37,177
186.2
11.7
11.1
10.1
10.1
13.1
20.0
6.7
34.9
48.9
16.2
29,513
FY19E 354,560
59,621
43,217
216.4
11.4
15.8
16.2
16.2
11.1
17.2
5.9
36.2
50.7
16.8
35,050
849,044
Buy
FY16 388,566
51,988
32,935
53.9
3.7
12.9
4.2
4.2
15.9
25.4
3.8
15.6
19.8
13.4
34,642
13.5
(2,230)
FY17 418,954
56,556
37,429
61.5
7.8
8.8
13.6
13.6
14.9
22.2
3.2
15.3
19.5
FY18E 475,467
67,262
43,117
71.1
13.5
18.9
15.2
15.2
12.4
19.2
2.9
15.4
19.8
14.1
25,597
FY19E 528,919
75,557
48,289
79.7
11.2
12.3
12.0
12.0
10.9
17.1
2.5
15.3
20.0
14.3
30,376
2,222,418
Buy
FY16 575,381
88,844
53,643
177.6
15.5
36.7
47.3
47.3
23.1
41.9
7.5
20.0
28.0
15.4
66,193
FY17 680,348
103,530
73,377
243.0
18.2
16.5
36.8
36.8
19.2
30.6
6.2
22.2
30.1
15.2
54,984
FY18E 793,385
124,596
88,810
294.1
16.6
20.3
21.0
21.0
15.4
25.3
5.3
22.7
30.8
15.7
71,559
FY19E 916,208
145,507
105,528
349.4
15.5
16.8
18.8
18.8
12.6
21.3
4.5
23.0
31.4
15.9
90,976
1,514,683
Buy
FY16 2,730,456
383,075
144,504
42.5
3.9
(2.5)
10.0
4.2
4.5
10.5
1.9
21.4
16.6
14.0
63,104
FY17 2,696,925
334,988
94,994
28.0
(1.2) (12.6)
(34.3)
(34.3)
5.7
15.9
2.6
13.9
11.9
12.4
14,962
11.2
2.1
20.6
14.4
13.5
77,737
42.7
4.7
FY18E 2,944,745
397,543
135,502
39.9
9.2
18.7
42.6
FY19E 3,293,976
444,509
165,961
48.9
11.9
11.8
22.5
22.5
4.0
9.1
1.7
20.5
15.3
13.5
140,793
Note: For Eicher Motors, FY16 includes 15 month financials, but growth adjusted for like-for-like comparison. FY17 revenue and EBITDA growth are not comparable due to IND-AS transition
Mkt cap
(INR mn)
299,671
Automobiles
At a glance
Edelweiss Securities Limited
Automobiles
Edelweiss versus Consensus
Table 2: Our estimates versus consensus
Companies
Year
Ashok Leyland FY18
FY19
Bajaj Auto
FY18
FY19
Eicher Motors FY18
FY19
Hero Motocorp FY18
FY19
M&M
FY18
FY19
Maruti Suzuki FY18
FY19
Tata Motors (C) FY18
FY19
Revenues
Edel Consensus Variance (%)
241,260 222,538
8.4
276,354 252,694
9.4
249,974 244,977
2.0
276,313 278,000
(0.6)
93,806
88,783
5.7
127,598 112,083
13.8
318,177 325,091
(2.1)
354,560 366,286
(3.2)
475,467 486,474
(2.3)
528,919 541,619
(2.3)
793,385 800,835
(0.9)
916,208 925,552
(1.0)
2,944,745 2,890,583
1.9
3,293,976 3,264,231
0.9
EBITDA
Edel Consensus Variance (%)
24,777
24,447
1.4
30,797
28,164
9.4
52,311
48,092
8.8
58,261
56,173
3.7
30,621
29,841
2.6
43,449
37,201
16.8
51,498
52,487
(1.9)
59,621
56,520
5.5
67,262
59,500
13.0
75,087
71,599
4.9
124,596 120,648
3.3
145,507 140,528
3.5
397,543 388,099
2.4
444,509 476,685
(6.7)
PAT
Edel Consensus Variance (%)
14,547
14,173
2.6
18,936
16,980
11.5
44,800
42,558
5.3
49,525
49,095
0.9
23,597
22,069
6.9
33,633
27,534
22.1
37,177
37,820
(1.7)
43,217
40,741
6.1
43,117
40,008
7.8
47,958
45,436
5.6
88,810
85,852
3.4
105,528 101,773
3.7
135,502 132,939
1.9
165,961 183,655
(9.6)
Source: Bloomberg, Edelweiss research
6
Edelweiss Securities Limited
Automobiles
Volume snapshot
Table 3: Volume snapshot
FY16
FY17
FY18E
FY19E
CAGR FY15-17 CAGR FY17-19E
Ashok Leyland
M&HCV
109,755
113,292
124,633
141,558
20.8
11.8
LCV
30,603
31,774
34,316
37,061
8.0
8.0
Total
140,358
145,066
158,949
178,620
17.6
11.0
Bajaj Auto
Motorcycles
1,898,957
1,992,092
2,132,046
2,369,746
6.0
9.1
3 Wheeler
254,995
253,226
265,887
279,182
4.0
5.0
Domestic
2,153,952
2,245,318
2,397,933
2,648,927
5.8
8.6
Motorcycles
1,459,295
1,233,104
1,381,077
1,546,806
(10.0)
12.0
3 Wheeler
280,000
196,000
219,520
241,472
(17.0)
11.0
Export
1,739,295
1,429,104
1,600,597
1,788,278
(11.0)
11.9
Total
3,893,247
3,674,422
3,998,530
4,437,205
(1.8)
9.9
Eicher Motor*
VECV
62,843
55,338
59,835
65,851
15.0
9.1
Royal Enfield
601,000
666,490
841,162
1,112,407
42.0
29.2
Total
663,843
721,828
900,997
1,178,257
39.3
27.8
Hero Motocorp
Motorcycles
5,603,128
5,693,681
6,191,284
6,824,977
0.2
9.5
Scooters
818,777
789,974
884,771
990,943
2.5
12.0
Exports
210,239
180,391
207,450
278,841
(5.0)
24.3
Total
6,632,144
6,664,046
7,283,504
8,094,762
0.3
10.2
Maruti Suzuki
Domestic
1,305,351
1,444,541
1,643,035
1,861,910
11.1
13.5
Exports
123,897
124,062
136,468
147,386
1.0
9.0
Total
1,429,248
1,568,603
1,779,503
2,009,296
10.2
13.2
M&M
PV
225,719
236,204
256,445
278,462
6.1
8.6
Pickups
167,888
180,876
201,925
226,156
6.7
11.8
3 Wheelers
54,975
52,306
53,352
54,953
(4.0)
2.5
Total
448,582
469,386
511,722
559,570
5.0
9.2
Tractors
195,745
248,409
283,186
311,505
6.2
12.0
Exports
47,491
51,824
56,284
61,531
7.6
9.0
Grand Total
691,818
769,619
851,192
932,606
5.6
10.1
Tata Motors - JLR (ex China JV)
Jaguar
102,107
169,284
178,170
190,877
48.8
6.2
Landrover
407,228
373,509
407,914
450,294
(2.1)
9.8
Total
509,335
542,793
586,083
641,171
7.9
8.7
China JV
29,000
65,000
90,000
110,000
n/a
30.1
Tata Motors - Standalone
M&HCV
176,323
169,029
180,306
192,432
8.8
6.7
LCV
181,467
184,348
200,304
220,480
(2.5)
9.4
PVs
152,656
176,211
201,809
222,592
3.2
12.4
Total
510,446
529,589
582,418
635,503
2.7
9.5
* Eicher Motors is a CY ending company till 2014 and FY16 is for 15 months. Growth has been adjusted for like for like comparison
Source: SIAM, Edelweiss research
7
Edelweiss Securities Limited
Automobiles
Passenger Vehicles: MSIL Widening Gap With Peers
Today, MSIL is a virtual monopoly, a trend we see only consolidating over the next 3-5
years. While the company has done a catch up on the premiumisation band wagon
very well, competition has gone back to the drawing board to recalibrate the strategy
(including exiting domestic market). It has not only increased market share (~900bps
in 5 years), but is also expanding its dominance across other key areas—product
launch cycle (2-3 launches every year), distribution reach (trebling on a high base),
margin and free cash flow cycle. We detail these in the report. And, given the
company’s obsession with customer satisfaction, we do not see the scenario changing
over the next few years.
Premiumisation: Name of the game
Premiumisation trend has gained palpable ground in PVs, amply reflected in changing
industry volume mix — entry category which accounted for ~50% of industry volumes in
FY05, plummeted to sub-30% in FY17. Customers, in quest for bells and whistles, have
upgraded to higher price mid-size and executive segments: (a) the mid-size segment’s share
catapulted to 46% in FY17 from ~30% in FY05; and (b) the executive category’s share
jumped to 20.0% in FY17 from 8.7% in FY05. Interestingly, the broader premiumisation
trend entails finer contours: (a) preference for SUVs over cars; and (b) and preference for
automatic transmission.
Chart 1: Premium segment growth has outpaced that of entry segment
PV units (% of total)
100
80
60
1.0mn
1.9mn
11.1
8.7
6.7
10.8
29.7
37.1
3.0mn
6.2
20.3
46.0
40
20
0
50.5
45.3
FY05
Entry
27.5
FY10
Mid size
Executive
FY17
Premium
Source: SIAM, Edelweiss research
Note: Price range for PVs – Entry (<INR0.5mn), Mid-size (INR0.5-0.8mn), Executive (INR0.8-1.2mn)
and Premium (>INR1.2mn)
8
Edelweiss Securities Limited
Automobiles
Chart 2: Share of UVs saw steep increase in recent years
80
6.1
7.7
16.5
14.0
6.0
60
40
78.3
77.3
25
24.0
25.0
69.0
Volume share (%)
PV industry volume mix (%)
100
Chart 3: Share of AMTs poised for spurt
30.0
18.0
12.0
6.0
20
0.0
0
FY05
FY10
Cars
UVs
FY17
10
6
2016
2015
2020
Share of AMT in total car market
Vans
Source: SIAM, Edelweiss research
Source: Frost and Sullivan, Edelweiss research
Taking MSIL as a proxy to industry, while the company’s volume CAGR over FY07-17was
8.6%, its value CAGR was far higher at ~14.6%, reflecting rising preference for value addition.
Chart 4: MSIL grew by 14.6% in value terms…
750
609
Volumes (''000s units)
600
Revenues (INRbn)
Chart 5: … as opposed to only 8.6% in volume terms
1,750
450
300
150
0
156
1,250
1,000
750
500
FY07
FY17
Maruti domestic revenues
1,445
1,500
636
FY07
FY17
Maruti domestic volumes
Source: Company, Edelweiss research
The premuimisation trend has coincided with rising income profile of the Indian population.
The share of relevant income groups—Aspirers, Affluent and Elite (annual income
>INR0.5mn)—jumped to 24% in 2016 from 13% in 2005 (implying 8% CAGR). More
importantly, population of relevant group is expected to post a healthy 6% CAGR (implying
addition of 185mn people versus 145mn in the previous decade).
9
Edelweiss Securities Limited
Automobiles
Chart 6: Share of affluent and elite households to spike over FY16-25
209mn
1.5
3.3
8.1
Income distribution (%)
100
80
266mn
2.4
6.4
15.0
305mn
5.2
10.8
20.0
42.6
60
45.4
45.9
40
44.5
20
0
30.8
2005
Strugglers (INR<0.15mn)
Aspirers (INR0.5mn-1.0mn)
Elite (INR>2mn)
18.0
2016
2025
Next billion (INR0.15mn-0.5mn)
Affluent (INR1.0mn-2.0mn)
Source: BCG report, Edelweiss research
Geographical diversity: Highest in world, making distribution critical
Another interesting aspect of consumer preference is the diversity in customer preference
across regions and widespread distribution of population. For instance, only 15% of India’s
total population resides in 57 cities with 1mn plus population, by far the lowest in the world.
In China, 20% of population resides in 1mn plus cities. Moreover, given India’s regional
diversity, each state/city has a different preference, complicating the task for a company
eyeing a one-fit for all products.
Chart 7: Geographical diversity highest in India
66
Brazil
USA
India
China
0
22
No of cities (>1mn population)
40
13
11
20
0
Japan
15
Indonesia
20
30
20
Russia
40
80
60
49
43
South Korea
60
Mexico
Number
80
Share of population (%)
100
100
% of total population (RHS)
Source: United Nations, Edelweiss research
Wide distribution footprint: A vital cog
India is a unique market with a well spread 1mn plus cities with diverse preferences and
value propositions. This necessitates a wider distribution and after-sales reach. On this
count, MSIL continues to maintain strong lead over competition. This reflects the company’s
unwavering focus on creating brand equity in smaller markets, way ahead of peers, and
entrenching itself to reap benefits of demand as and when it fructifies.
10
Edelweiss Securities Limited
Automobiles
Chart 8: MSIL’s distribution network way ahead of competition
Number of dealerships
2,500
2312
2,000
1,500
1,000
2.9x
802
500
0
2.1x
2.5x
1.7x
275
Maruti
470
135
Hyundai
FY10
335
100
Honda
213
Toyota
FY17
Source: Company, Edelweiss research
Note: Figures in boxes indicate the pace of dealership expansion over FY10-17
One-fit-for-all products strategy: No longer relevant
We believe, the Indian vehicle market has graduated from one-fit-for-all products to
targeted product launches. This implies: (1) a series of offerings at same price point with a
different value proposition; (2) shrinking opportunity size per model; and (3) platform
sharing & a structured product launch cycle have become critical. We believe, MSIL is well
placed on all the above parameters.
Table 4: Platform sharing and multiple offerings at similar price points – MSIL excels
Category
MSIL
Hyundai
Honda
Toyota
Tata Motors M&M
Alto
Eon
Tiago
Entry
Wagon R
Celerio
Mid Size
Ignis
Grand i10
Liva
KUV1OO
Amaze
Tigor
Swift
Xcent
Zest
Dzire
Elite i20 Jazz
Baleno
Executive
Ertiga
Verna
Etios
Bolero
WR-V
Brezza
TUV3OO
City
Ciaz
Volkswagen Ford
Ameo
Figo
Aspire
Vento
Ecosport
Renault
Kwid
Duster
Source: SIAM, Edelweiss research
Note: Only models with reasonable volumes have been included
MSIL has guided for 20 model launches (new + upgrades) over FY15-20, 9 of which have
been launched so far. This implies that new product rollout remains on track and the
company will continue to unveil at least 1 new model and 2 major upgrades every year. It
has also transformed its product launch strategy and is now sharpening focus on product
segmentation and launching models for specific target customers. The company’s
prescience and prudence are all the more commendable at a time when most peers are
either going back to the drawing board to devise a new strategy or are downing shutters in
the domestic market.
11
Edelweiss Securities Limited
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Competitive intensity: Subdued compared to past
In the past 5-6 years, the PV segment has seen frenetic activity on the new launches front. MSIL,
Hyundai, Honda, Ford, General Motors (GM), Renault and Volkswagen (VW) have flooded the
market with a slew of launches in a bid to cash in on the immense growth potential. However,
success has been elusive and most entrants have failed to make any credible inroads in terms of
market share gains.
Chart 9: Model launch activity fairly intense in past 4 years
New launches (number)
22
18
18
14
11
18
17
11
10
6
2
5
4
4
3
FY04-07
Sub 0.5mn
FY08-12
0.5 - 0.8mn
FY13-17
0.8 - 1.2mn
Source: SIAM, Edelweiss research
In the past 5-6 years, only MSIL and Hyundai have continued to gain market share
leveraging on first-mover advantage, steady launches of new models/upgrades and a wide
distribution network.
Table 5: MSIL and Hyundai have continued to gain market share
PV Market share (%)
FY11
FY12
FY13
FY14
FY15
Maruti
45.3
38.4
39.3
42.1
45.0
Hyundai
14.4
14.8
14.3
15.2
16.2
M&M
7.3
9.4
11.6
10.1
8.6
Tata Motors
14.0
14.2
11.8
8.0
6.2
GM
4.3
4.2
3.3
3.2
2.0
Ford
3.9
3.5
2.9
3.4
2.9
Honda
2.4
2.1
2.7
5.4
7.3
Toyota
3.4
6.1
6.2
5.2
5.4
Volkswagen
2.0
2.9
2.4
2.1
1.7
Renault
0.0
0.1
2.0
2.3
1.7
Others
3.1
4.3
3.4
3.1
3.0
FY16
46.8
17.4
8.5
5.4
1.2
2.9
6.9
4.6
1.5
2.6
2.5
FY17
47.4
16.7
7.8
5.7
0.8
3.0
4.5
4.7
1.6
4.4
3.3
Source: SIAM, Edelweiss research
12
Edelweiss Securities Limited
Automobiles
Winner takes it all
Another important aspect of the PV industry is that leader, MSIL, has been able to widen the
gap with peers on all aspects—market share (discussed earlier), margin, free cash flow and
localisation. While MSIL’s free cash flow was under pressure during FY11-13, in past 4 years,
it has been generating strong free cash flow. Apart from MSIL, Hyundai is the only player
which has been generating free cash. The fact that both Hyundai and MSIL are operating at
100% utilisation levels ensures sustenance of free cash flow generation.
Table 6: EBITDA margin, free cash flow, net debt/equity and localisation trend across players
Company
FY11
FY12
FY13
FY14
EBITDA margins (%)
MSIL
9.9
7.1
9.7
11.6
Hyundai
9.9
9.4
9.5
9.8
Honda
5.2
(9.2)
(21.2)
(0.9)
Ford
3.7
3.1
(0.2)
(1.4)
Renault
(363.3)
(57.6)
2.3
(1.6)
GM
1.5
(9.2)
(19.0)
(105.7)
VW
16.0
13.4
17.6
Toyota
7.5
3.8
3.7
3.2
FCF as % Revenues
MSIL
1.9
(1.2)
(4.9)
3.1
Hyundai
5.5
1.3
(0.1)
3.2
Honda
(14.2)
(13.3)
(46.0)
(23.8)
Ford
(0.6)
0.0
(37.7)
(39.0)
Renault
0.0
(103.3)
1.3
(6.9)
GM
(19.3)
(8.2)
(31.0)
(15.0)
VW
0.0
(2.4)
8.9
3.2
Toyota
(16.2)
(3.1)
(10.5)
3.7
Net Debt to Equity (x)
MSIL
(0.5)
(0.5)
(0.3)
(0.4)
Hyundai
0.2
0.1
0.2
0.2
Honda
1.6
0.3
0.6
2.8
Ford
1.2
0.8
0.6
1.3
Renault
(1.2)
(1.9)
(2.0)
0.9
GM
0.2
0.8
1.8
(0.7)
VW
0.0
2.3
2.0
1.2
Toyota
0.6
1.0
2.0
1.8
Forex Outgo as % Revenues
MSIL
17.0
18.8
20.4
18.3
Hyundai
25.4
27.6
31.7
30.6
Honda
39.0
43.7
44.9
30.6
Ford
42.1
Renault
89.7
1.0
0.3
GM
42.7
47.9
54.6
43.1
VW
1.6
40.7
Toyota
37.5
FY15
FY16
FY17
13.0
9.7
8.9
0.2
(3.8)
(39.2)
17.3
9.4
15.4
10.1
8.4
6.1
(11.2)
(17.8)
12.0
9.6
15.2
-
7.7
1.9
6.8
(34.4)
(14.3)
(71.0)
8.3
8.5
8.5
5.5
(7.5)
(8.9)
(14.8)
(41.2)
0.3
(7.1)
8.1
-
(0.5)
0.1
1.6
1.5
(15.5)
(0.3)
0.7
0.6
(0.6)
(0.1)
2.4
2.5
14.1
0.1
0.8
1.2
(0.6)
-
15.2
28.3
21.1
44.2
0.5
31.9
38.4
37.0
14.0
26.6
2.3
0.6
63.0
35.0
38.4
-
Source: Capitaline, Edelweiss research
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Automobiles
Chart 10: Capacity utilisation– MSIL/Hyundai seem to be planning expansion well
100
FY17 Utilisation (%)
80
60
40
20
0
Maruti
Hyundai
Honda
Ford
Renault
GM
Capacity utilisation
Source: Companies, Edelweiss research
In case of most fringe players, given the cash burn, funding support from parents has
slackened over the years. This indicates a change in tack as they are focusing on: (a) creating
a brand & positioning; and (b) low cost of manufacturing rather than muscle power to
create a presence in India. While General Motors (GM) has taken the adverse step of exiting
the domestic market, the Volkswagen Group has been trying avenues to reduce costs (by
joint sharing of platforms with other players)
Table 7: Trend in capital infusion by promoters
Share capital (INRmn)
FY10
No change in funding from parent entity
MSIL
1,445
Hyundai
8,125
Toyota
7,000
VW
Honda
3,600
Continued increase in funding from parent entity
Ford
21,220
GM
24,712
Renault
FY11
1,445
8,125
7,000
FY12
FY13
FY14
FY15
FY16
3,600
1,445
8,125
7,000
14,387
5,700
1,510
8,125
7,000
16,192
7,744
1,510
8,125
7,000
16,192
7,744
1,510
8,125
7,000
16,192
7,744
1,510
8,125
7,000
16,192
7,744
21,220
28,809
2,017
28,890
28,809
2,017
47,670
36,178
2,017
57,000
45,264
9,563
75,180
78,051
9,563
75,180
90,061
20,563
Source: Capitaline, Edelweiss research
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Automobiles
2 Wheelers: Early Bird Catches the Worm
In 2W, we argue the ability to carve a new category is the sole success mantra, and
once a player achieves leadership, it’s difficult to dislodge him. At the current
juncture, we see 2 categories that will drive industry growth - scooters and >250cc
motorcycles. The key drivers being shift in preference, lower penetration levels and
emergence of women as key demand influencers. Share of scooters can rise to at least
50% from 32% in FY17 at the cost of commuter bikes; and (ii) >250cc motorcycles’
(~27% of premium motorcycles) share can easily double driven by extremely low
penetration levels (3/1,000 males versus 23/1,000 males for premium bikes and
15/1,000 people for cars). HMSI (market share at ~57%, up by ~900bps) in scooters
and EIM (~95% market share) in >250cc motorcycles are best placed to capitalise on
this trend. While Royal Enfield (RE) stands out on its margin and cash flow profile with
~31% and 12% (of sales) respectively, HMSI has improved its margin and is now in
striking distance of industry leader, both in terms of margins and market share.
Scooters gaining ground riding convenience and comfort proposition
Convenience and comfort have been the twin wheels spurring demand for gearless scooters.
Scooters’ penetration has jumped sharply in recent years, with their share in 2W volumes
catapulting to ~32% in FY17 from 17% in FY11. In the commuter space, the share of scooters
has catapulted to 40% in FY17 from 22% in FY11. Our channel checks indicate that a mid-30s
motorcycle owner is replacing his commuter motorcycle either with a scooter or a premium
motorcycle. Among other factors, higher share of women consumers and the unisex appeal
of scooters are driving the shift from commuter bikes to scooters.
Chart 11: Convenience – Scooters continue to gain share from commuter bikes
100
Volume mix (%)
80
60
40
11.7mn
13.4mn
13.7mn
14.8mn
16.0mn
16.4mn
17.5mn
17
19
21
24
28
31
14
32
13
12
12
13
14
14
63
62
61
59
55
51
49
FY11
FY12
FY13
FY14
FY15
FY16
FY17
20
0
Commuter bike
Premium bike
Scooters
Mopeds
Source: SIAM, Edelweiss research
It is interesting to note that demand has shifted to scooters despite lower fuel economy and
premium pricing compared to corresponding commuter motorcycles. This indicates that ease
of driving and convenience have spearheaded surge in demand for scooters.
15
Edelweiss Securities Limited
Automobiles
Chart 12: Scooters offer lower mileage and priced higher than commuter bikes
On road price Mumbai(INR)
75,000
Super Splendor Glamour
Fascino
CB Shine
Maestro Edge
Passion XPro
Activa 125
Discover 125
Duet
Ray
Jupiter
Pleasure
Passion Pro
Dream Yuga
Victor
Access
Gusto
Activa
Dream Neo
Dio
71,000
67,000
63,000
59,000
55,000
40
50
60
70
80
90
Fuel economy(kmpl)
Source: Autocar, Edelweiss research
Note: Blue dots indicate scooter models and the red dots indicate motorcycle models
Where will scooters share stabilise? We believe it can be at least 50%
This is the most important question that will determine the long-term positioning of many
players in the domestic 2W space. Our deep dive analysis of state-level sales of scooters
reflects some interesting trends:
•
Scooters sales closely linked to literacy rate of women: For instance, scooters’
penetration is low in states (Bihar, Uttar Pradesh, Rajasthan and MP) which account for
~37% of total population (refer table next page). And, in these states, female literacy
levels are not only significantly below the national average of 65.5%, the divergence
with male literacy levels is higher than the national average of 16.6% (indicative of a
culturally male dominated society).
•
Scooters demand not linked to per capita income (PCI): For instance, in West Bengal
(PCI of INR70K) 22% of 2W sales pertain to scooters; this is similar to UP where scooter
penetration is 17% (PCI of INR36K). Similarly, Manipur and Assam, with PCI of
INR41.5K/44K, have very high scooters penetration of 86%/39%.
We envisage scooters’ share to grow to ~50%, if not higher: Scooters penetration in
Gujarat, Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu, which account for ~32%
of total population, stands at >40%. In smaller states like Manipur, Goa, Mizoram, Himachal
Pradesh and Kerala, which account for ~4% of population, scooters’ share ranges from 5086%. Hence, there is humungous scope for the share to increase in states that account for
~65% of population, which can drive scooters penetration. Moreover, the pace of share
increase hinges on acceptance of scooters in the Hindi belt (Bihar, Uttar Pradesh, Rajasthan
and Madhya Pradesh).
16
Edelweiss Securities Limited
Automobiles
Table 8: Scooters penetration closely linked with female literacy levels, indicating immense opportunity
State
Scooters
(as % 2W
volumes)
Share of
population (%)
Female
Literacy (%)
Divergence
to male
literacy (%)
7.9
16.6
20.7
23.2
22.6
41.3
37.0
41.0
41.3
35.8
36.4
31.7
8.6
16.5
5.7
6.0
7.6
5.0
7.0
5.1
9.3
6.0
23.4
100.0
53.3
59.3
52.7
60.0
71.2
70.7
59.7
68.1
75.5
73.9
69.6
65.5
20.1
20.0
27.9
20.5
11.5
16.5
15.8
14.7
14.3
13.0
14.6
16.6
Bihar
Uttar Pradesh
Rajasthan
Madhya Pradesh
West Bengal
Gujarat
Andhra Pradesh
Karnataka
Maharashtra
Tamil Nadu
Others ( 26 states/Union Territories)
All India
Per capita
% share in total
income
scooter sales
(INR)
31,199
36,250
65,974
51,798
70,059
106,831
81,397
89,545
117,091
112,664
83,628
73,562
1.1
6.3
3.8
3.7
3.5
8.8
7.8
8.6
14.3
10.4
31.8
100.0
Source: SIAM, Census, Edelweiss research
Styling and premiumisation driving shift to >250cc motorcycles
Within the premium motorcycle segment (150cc and above), demand has markedly shifted
towards the >250cc segment (up from 8% to 27% of premium motorcycle market). We
attribute this to:
1.
Rising income levels versus cost of vehicle: Per capita income has increased ~6% in
past 15 years, whereas vehicle prices have increased only 1-2%.
2.
Changing consumer preference (similar to PV).
3.
Style and brand quotient as most existing 150-250cc bikes are look-alikes or copies.
Chart 13: Style - Demand shift towards >250cc motorcycles
100
Volume mix (%)
80
1,610K
7.6
7.9
1,739K
2,014K
12.1
7.9
16.8
7.4
2,239K
2,510K
23.0
26.9
7.2
6.9
60
40
84.5
79.9
75.7
69.7
66.1
FY14
FY15
FY16
FY17
20
0
FY13
<200cc
200-250cc
>250cc
Source: SIAM, Edelweiss research
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Edelweiss Securities Limited
Automobiles
>250cc: Premiumisation, low penetration sizeable opportunity
In our view, the opportunity size for >250cc motorcycles is reasonably big. For instance, in
the past 5 years ~2.8mn 150-250cc motorcycles have been sold. Of these, a reasonable
proportion of consumers are bound to upgrade to the premium motorcycle segment. Apart
from this, players like RE have seen upgrades from commuter segment bikes as well.
Similarly, penetration of >250cc motorcycles (as % of male population) is extremely low at
~3 per 1,000 males.
(Number)
Chart 14: Penetration of > 250cc bikes vs premium bikes (per 1,000 males) vs cars
28
23.0
20.9
22
19.0
17.3
15.2
15.1
14.1
17
12.9
13.1
12.1
10.4
11.1
9.8
11
6
0
8.6
0.6
0.6
FY11
FY12
0.8
1.0
1.5
2.1
3.0
FY13
FY14
FY15
FY16
FY17
4Ws per 1000 people
Motorcycles (>250cc) per 1000 males
Premium motorcycles per 1000 males
Source: SIAM, Census, Edelweiss research
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Automobiles
2W: Competitive landscape - Leaders hold; success eludes challengers
Is the competitive intensity in 2Ws high, but irrelevant? Each player has a stronghold in a
sub-segment and is able to defend the same, despite continuous launches by challengers, by
virtue of first-mover advantage. For instance, Hero Motocorp has held on to its market
share in the commuter segment, HMSI in the scooter segment, Bajaj Auto in the 150-200cc
segment and RE in the >250cc segment. This despite a series of launches by competition.
However, at the aggregate level, HMCL’s leadership is being challenged due to rising share
of scooters and premium motorcycles, where it has limited presence.
80
2W market share (%)
Market share(%)
Chart 15: Leaders defending their turf, but HMCL losing at aggregate level
100
100
60
40
20
0
HMCL Executive
Bajaj - 150
to 250cc
FY13
Royal
Enfield >250cc
80
60
1
14
1
13
1
12
2
13
3
13
4
14
19
18
14
11
12
11
15
19
24
27
26
27
45
43
41
40
39
37
FY12
FY13
FY14
FY15
FY16
FY17
40
20
HMSI Scooters
0
HMCL
FY17
HMSI
Bajaj
TVS
Royal Enfield
Others
Source: SIAM, Edelweiss research
Table 9: Very few successful 2W launches in recent years
Time Period
Segment
FY13-15
Entry
Executive
Premium
Scooters
Entry
Executive
Premium
Scooters
FY15-17
No of new launches Success models
0
4
3
4
1
5
3
4
Jupiter
V150
Avenger
Source: SIAM, Edelweiss research
Moreover, the industry’s financial health is far superior than that of PVs. All players
generate reasonable RoE as well as free cash flow. Hence, we anticipate sustained efforts to
introduce new products. Having said that, the track record of new launches indicates very
low success rate.
19
Edelweiss Securities Limited
Automobiles
Table 10: Financials of 2W players have remained healthy in recent years
Company
FY11
FY12
FY13
FY14
FY15
FY16
EBITDA margins (%)
HMCL
13.5
15.4
13.8
14.0
12.8
15.5
Bajaj Auto
19.5
19.0
18.4
21.5
19.5
21.2
HMSI
11.9
11.4
9.9
10.1
11.0
13.3
TVS Motors
6.2
6.6
4.4
5.6
6.0
6.7
Royal Enfield
10.3
11.9
13.9
18.4
24.2
28.0
Net Debt to Equity (x)
HMCL
(1.8)
(0.9)
(0.8)
(0.8)
(0.5)
(0.6)
Bajaj Auto
(0.8)
(0.9)
(0.7)
(0.8)
(0.8)
(0.7)
HMSI
(0.5)
(0.5)
(0.4)
(0.5)
(0.5)
(0.5)
TVS Motors
0.8
0.7
0.5
0.3
0.6
0.5
Royal Enfield
(1.0)
(0.9)
(1.0)
(1.1)
(1.0)
(0.9)
FCF as % Revenues
HMCL
(3.0)
6.5
5.8
8.1
4.8
9.6
Bajaj Auto
12.2
15.1
8.5
16.4
9.8
14.9
HMSI
(2.8)
(0.0)
(2.9)
3.8
1.8
2.7
TVS Motors
1.9
3.3
4.3
3.5
(2.8)
3.0
Royal Enfield
6.6
3.1
15.2
14.3
11.7
15.8
RoE (%)
HMCL
71.2
55.6
42.3
37.7
33.7
39.4
Bajaj Auto
57.3
51.4
38.1
35.4
31.6
29.6
HMSI
31.1
26.5
17.3
19.3
21.3
22.9
TVS Motors
20.9
22.9
14.8
19.8
22.7
24.1
Royal Enfield
17.6
25.0
24.8
38.4
54.4
72.7
FY17
16.3
20.3
7.1
31.3
(0.6)
(0.8)
0.4
(0.9)
10.1
14.0
1.6
11.7
33.4
22.5
25.7
51.4
Source: Capitaline, Edelweiss research
What is the success mantra in 2W?
We believe, the only success mantra is being the first-mover in identifying and creating
a new segment and a differentiated brand positioning. Time and again, the 2W industry
has thrown enough examples of the same—HMCL’s runaway success during 1995-2005
with a category creating Splendor or Bajaj Auto’s success with the 150-200cc category
Pulsar or HMSI’s success with Activa in scooters.
20
Edelweiss Securities Limited
Automobiles
Chart 16: HMCL outperformed industry growth with Splendor’s success
Volume growth (%)
65
50
35
20
5
(10)
FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05
HMCL volumes YoY
2W industry volumes YoY
Chart 17: Strong response to Pulsar aided Bajaj Auto’s outperformance
45
Volumes (YoY)
30
15
0
(15)
(30)
FY03
FY04
FY05
FY06
FY07
Bajaj motorcycle volumes YoY
FY08
FY09
FY10
FY11
Industry motorcycle volumes YoY
Chart 18: Activa’s runaway success drove HMSI’s outperformance
40
Volume growth (%)
30
20
10
0
(10)
FY08
FY09
FY10
FY11
HMSI volumes YoY
FY12
FY13
FY14
FY15
FY16
FY17
2W industry volume YoY
Source: SIAM, Edelweiss research
21
Edelweiss Securities Limited
Automobiles
M&HCV: Challenger Dethroning the Leader?
In commercial vehicles (CVs), we perceive 3 structural trends: 1) demand shifting to
higher tonnage segments. Ashok Leyland (AL), with strong positioning in higher
tonnage (>35T) segment, will be key beneficiary; 2) leader in each sub-segment has
lost market share and we expect the trend to sustain; and 3) distribution reach
continues to remain a vital cog (has helped AL gain market share). In addition, industry
is shifting from a pure after-sales-led model to a solutions-led industry as technology,
safety and comfort gain prominence– this too should play to AL’s favour.
Demand drivers: Changing dynamics
Over the past few years, truck demand has sprung a positive surprise as it has defied
traditional correlation with IIP, thereby raising questions on sustainability of demand.
The new IIP series (released on May 12, 2017) partly addresses the conundrum of link
between tonnage and IIP growth. Also, demand has shifted to higher tonnage vehicles
in M&HCVs and LCVs.
Chart 19: Divergence between M&HCV tonnage growth and IIP is lower in new series
14.0
YoY (%)
11.4
8.8
6.2
3.6
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
1.0
M&HCV goods tonnage carrying capacity growth (YoY)
IIP growth - New
IIP growth - Old
Source: CMIE, SIAM, Edelweiss research
We believe, there are 3 key reasons (acting simultaneously) for demand shifting to
higher tonnage:
•
22
Improving road conditions: This has led to shorter lead times and hence propelled
demand for new and higher tonnage trucks. Unlike the developed world, in India
older trucks are not well maintained, thereby affecting fuel efficiency and speed.
Edelweiss Securities Limited
Automobiles
Chart 20: Road addition (NHAI)
3,500
Road addition (km)
3,000
2,500
2,704
2,693
2,628
2,248
2,148
2,000
1,786
1,501
1,500
1,000
1,987
1,897
FY09
FY10
FY11
FY12 FY13 FY14
NHAI road addition
FY15
FY16
FY17
Source: National Highways Authority of India (NHAI), Edelweiss research
•
Drivers’ shortage: There is a rising shortage of drivers due to more remunerative
and less strenuous alternate employment opportunities. This has prompted fleet
operators to upgrade to higher tonnage trucks to cater to freight demand.
•
Overloading ban: While the ban was first announced by the Supreme Court in 2005,
implementation is still not 100%. There are numerous examples which indicate that
the ban is not being implemented as yet due to lack of weighing machines at toll
plazas. In fact, our interactions with companies indicate that there has been
renewed focus on implementing the ban on overloading across states like Uttar
Pradesh, Madhya Pradesh and Rajasthan (also confirmed by corporates).
Highlighted below are a few recent media reports indicating overloading and
actions initiated to control the same:
Dated: 07/04/2017: Stricter checking to control overloading in Hazira, Gujarat
Dated : 20/03/2017: Stricter checking to control overloading in Himachal Pradesh
Dated: 02/11/2016: Stricter checking to control overloading in Delhi
Dated: 17/10/2016: NHAI bans overloaded trucks on Pune – Solapur highway
Traditionally, AL enjoys strong position in the higher tonnage segment and we believe
the shift in demand to higher tonnage will lead to the company gaining market share.
23
Edelweiss Securities Limited
Automobiles
Chart 21: AL gained market share in higher tonnage segments
50
Market share (%)
44
38
32
26
20
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
16-25T (incl rigid vehicles)
>35T TT
26-35T TT
Total M&HCV Goods
Source: SIAM, Edelweiss research
Leadership: Challenged at every stage
In the past 6 years, in every sub-segment of the CV industry, leader has lost market
share. In fact, in a few segments (7.5-12T, 26-35T and LCV buses) new leaders have
emerged. This is the single most difference between CVs and 2W/PV (discussed earlier).
We attribute this to players like AL improving their reach as well as product basket and
quality.
Table 11: CV market share: Segmental analysis – Leader’s positioning has weakened across segments
Market leader(FY11)
Market leader(FY17)
Industry (FY17)
Tonnage Segment
Market
Market
Volume Tonnage
Company Volumes
Company Volumes
Volumes
share (%)
share (%)
mix (%) mix (%)
<2T (mini trucks)
Tata Motors
137,476
71.8 Tata Motors
82,766
71.4 115,961
18.8
1.8
2 - 3.5T (Pick up trucks)
M&M
59,762
74.3
M&M 137,511
65.9 208,542
33.9
8.5
3.5 - 7.5T
Tata Motors
30,693
69.7 Tata Motors
19,649
54.1
36,339
5.9
3.0
Tata Motors
25,489
46.0
VECV
17,502
39.6
44,235
7.2
4.5
7.5 - 12T
12 - 16T
Tata Motors
41,122
67.8 Tata Motors
23,157
51.3
45,122
7.3
8.3
16 - 25T
Tata Motors
55,581
65.0 Tata Motors
36,105
57.6
62,649
10.2
19.1
>25T (Rigid vehicles)
Tata Motors
30,542
68.7 Tata Motors
32,852
65.1
50,426
8.2
25.7
26 - 35T (Tractor trailer) Tata Motors
8,471
66.0
AL
6,382
42.5
15,018
2.4
6.1
>35T (Tractor trailer)
Tata Motors
10,226
63.1 Tata Motors
18,012
47.7
37,751
6.1
23.1
Total
Tata Motors 354,325
60.0 Tata Motors 273,776
44.4 616,043
100.0
100.0
LCV Goods (Up to 7.5T) Tata Motors
182,894
57.9
M&M 155,702
43.1 360,842
50.5
13.2
M&HCV Goods (>7.5T)
Tata Motors
171,431
62.3 Tata Motors
141,877
55.6 255,201
35.7
86.8
LCV Bus (Up to 7.5T)
Tata Motors
20,706
46.0
Force
21,320
41.9
50,862
7.1
n/a
M&HCV Bus (>7.5T)
Tata Motors
20,696
43.3 Tata Motors
14,917
31.6
47,262
6.6
n/a
Total LCV
Tata Motors
203,600
56.4
M&M 158,202
38.4 411,704
57.6
n/a
Total M&HCV
Tata Motors
192,127
59.5 Tata Motors
156,794
51.8 302,463
42.4
n/a
Total CV
Tata Motors 395,727
57.9 Tata Motors 304,089
42.6 714,167
100.0
n/a
Source: SIAM, Edelweiss research
24
Edelweiss Securities Limited
Automobiles
Table 12: … leading to loss in aggregate market share over the years
Market share (%)
FY11
FY12
FY13
FY14
FY15
Tata Motors
59.5
59.3
53.8
54.9
54.6
Ashok Leyland
25.7
23.3
26.2
25.8
28.5
VECV
9.2
10.7
12.8
11.9
10.7
M&M
0.5
1.1
1.5
1.9
1.9
Others
5.0
5.6
5.7
5.5
4.3
FY16
51.9
32.7
10.3
2.4
2.7
FY17
49.2
33.8
11.4
2.7
2.8
Source: SIAM, Edelweiss research
We believe, TTMT’s market share will continue to remain under pressure for 2 reasons:
•
High cash burn in the domestic business since the R&D spend is likely to remain at
elevated levels till the development of a new car platform in FY19; and
•
Expiry of excise incentives at the Pantnagar facility.
This is likely to continue to pressurise the company’s free cash flow. The weaker
financial position, we believe, will limit TTMT’s ability to discount aggressively to regain
market share.
Table 13: Except AL, financials of other truck manufacturers remain under stress
Company
FY11
FY12
FY13
FY14
FY15
FY16
FY17
R&D (as % revenues)
Ashok Leyland
2.8
2.8
2.4
2.6
1.5
1.5
1.9
Tata Motors
2.5
2.8
3.9
6.2
6.1
5.2
FCF (as % Revenues)
Ashok Leyland
0.9
1.9
(0.2)
3.9
14.5
8.2
8.9
Tata Motors
(2.4)
1.8
(0.8)
(1.9) (14.6)
(1.5)
(6.3)
Daimler
(474.5) (95.2) (61.8) (36.8)
0.0
VECV
4.6
(2.3)
(8.6)
(3.7)
(7.7)
2.4
1.5
RoE (%)
Ashok Leyland
16.6
14.9
3.2
(9.6)
4.6
14.3
25.4
Tata Motors
9.1
6.4
(2.9)
(6.5) (37.5)
(0.3) (11.9)
Daimler
(75.6) (97.7) (94.0) (48.0)
VECV
19.4
25.3
19.2
12.6
9.3
13.9
10.9
Net Debt to Equity (x)
Ashok Leyland
0.6
0.7
1.0
1.1
0.5
0.1
(0.2)
Tata Motors
0.8
0.8
0.9
0.8
1.2
0.4
0.7
Daimler
1.9
2.3
2.2
2.9
VECV
(0.8)
(0.6)
(0.3)
(0.2)
0.0
(0.1)
0.1
EBITDA margins (%)
Ashok Leyland
11.1
10.2
7.0
1.7
7.6
11.9
11.0
Tata Motors
9.8
7.8
4.3
(2.6)
(3.5)
6.9
2.8
Daimler
(144.8) (57.2) (26.7)
(2.0)
VECV
8.4
10.2
7.6
7.6
6.7
7.7
7.9
Source: SIAM, Capitaline, Edelweiss research
25
Edelweiss Securities Limited
Automobiles
Portfolio and network expansion also drove market share
AL’s success in the market share game was driven by conscious efforts to address gaps
in its product portfolio —intermediate commercial vehicles (ICV), small commercial
vehicles (SCV) and heavy commercial vehicles (especially 37T lift axle). While it has
enjoyed great success in HCVs, the ICV venture has been moderately successful thus far.
In SCVs, despite a good product (DOST), dispute with joint venture (JV) partner
curtailed success. However, with the acquisition of stakes in JV with Nissan, AL intends
to sharpen focus on this segment and is targeting a series of launches in the SCV space
on the DOST platform.
Table 14: Strong response to Guru/Sunshine to drive market share in ICV/LCV segments
Model
Segment
Tonnage
Year
DOST
BOSS
PARTNER
Mitr
DOST Strong
PARTNER four tyre
Mitr facelift
Sunshine
Guru
LCV goods
ICV goods
LCV goods
LCV bus
LCV goods
LCV goods
LCV bus
ICV bus
ICV goods
2-3.5T
7.5-16T
5-7.5T
5-7.5T
2-3.5T
5-7.5T
5-7.5T
7.5-16T
7.5-16T
FY12
FY14
FY14
FY14
FY15
FY15
FY15
FY17
FY17
Segment
% of Industry
AL market
Incumbent
volumes (FY17) volumes (FY17) share (FY17)
208,542
89,357
12,272
25,253
208,542
12,272
25,253
47,262
89,357
29.2
12.5
1.7
3.5
29.2
1.7
3.5
6.6
12.5
14.6
29.1
1.9
1.0
14.6
1.9
1.0
37.5
29.1
TTMT since FY04
TTMT since FY02
TTMT since FY02
TTMT since FY02
TTMT since FY04
TTMT since FY02
TTMT since FY02
TTMT since FY02
TTMT since FY02
Source: Company, Edelweiss research
Note: Ashok Leyland also launched a fully-electric bus - ‘Circuit’ in FY17
The company also tackled 2 other key concerns with respect to product offerings that
had plagued it during FY09-10. AL had faced component issues leading to far higher
complaints/breakdowns versus peers. It worked hard towards improving its
performance on these fronts by reducing part defects from ~8/vehicle to <0.5/vehicle.
The company has also consolidated its vendor base (supplying ~90% components) to
~40% to ensure better monitoring and economies of scale.
Apart from expanding product offerings, players have gained market share by widening
their distribution network. Case in point is AL, which expanded its network at 28% CAGR
during FY15-17, while its volumes posted 24% CAGR during the period.
26
Edelweiss Securities Limited
Automobiles
Chart 22: M&HCV volumes clocked 24% CAGR during FY15-17...
120,000
Chart 23: … but, network expanded at 28% CAGR
3,000
Dealership outlets
2,400
80,000
60,000
40,000
20,000
FY15
1,800
1,200
600
0
FY17
FY15
FY17
AL dealership outlets
AL M&HCV volumes
Source: Company, Edelweiss research
AL’s pace of network expansion has been much higher than market leader TTMT, which led
to market share gains. During FY15-17, while AL’s dealership network expanded at 28%
CAGR, TTMT has rationalised it. Pertinently, majority of AL’s expansion was in nontraditional non-South regions, leading to strong market share gains in traditionally weak
regions.
Chart 24: Faster network expansion by AL helped drive market share gain
4,000
3,488
Touchpoints (number)
Volumes (units)
100,000
3,365
3,400
2,678
2,800
2,200
1,600
1,000
1,629
FY15
AL network touchpoints
FY17
TTMT network touchpoints
Source: Company , Edelweiss research
The South accounts for 35% of AL’s volumes (versus 23% for industry). The company is
market leader in the region with ~53% share. However, market shares across North, East
and West are lower and below average. In comparison, market leader TTMT has a more
balanced market share across regions. Hence, we believe, there is immense scope for AL to
improve market share in non-South regions (accounting for 65% volumes) via dealership
expansion.
27
Edelweiss Securities Limited
Automobiles
34
28
22
16
10
Chart 26: Non-South regions majorly unexplored by AL
75
FY17 market share (%)
FY17 volume mix (%)
Chart 25: AL’s volume mix - Skewed towards South
40
60
45
30
15
0
North
East
AL
West
Industry
South
North
East
AL
West
South
Total
TTMT
Source: SIAM, Edelweiss research
28
Edelweiss Securities Limited
Automobiles
Sector Outlook and Valuations
We believe valuation framework of autos is in the midst of a step up - a mix of cyclical,
structural and company specific drivers. Our analysis of past 3 recovery cycles — FY9800, FY03-05 and FY09-11 — indicates that the auto sector is an early cycle play (before
the sharp volume recovery sets in), reflected in stock performance versus broader
indices. On margins front, there has been a sustained step up in the sector’s margins
and cash flows, in past few cycles. While we are pencilling a modest volume recovery
at this juncture, a sharp volume recovery is not ruled out. The auto sector has re-rated
(along with broader indices), with businesses of MSIL, EIM and HMCL having seen
higher re-rating. We see scope for further re-rating of strong auto businesses that can
demonstrate dominance in market share, margin/cash flows and lower cyclicality.
Various consumer facing businesses (from financials to commodities) that have shown
above mentioned traits have re-rated even more aggressively, and consistently.
In our view, the broader auto sector has re-rated, and in the historical valuation framework, appears expensive. We believe the valuation framework is in the midst of a step-up, a
mix of cyclical, structural and company specific drivers. This, as we argue below, suggests
one should look at further rerating ahead rather than compare with less relevant historical
average.
•
Cyclical recovery: Anecdotal data indicates the likelihood of strong cyclical demand in
the 2 years following a trough GDP year. We argue there is a cyclical step-up ahead – it
may not necessarily be as sharp as previous bounces (and we factor in only moderate
volume increase). The recovery should be more pronounced for MHCVs (than PV & 2W
demand). The top-down (economic and interest rate cycle along with implementation
of reforms (overloading ban, road addition, GST, etc) suggests we are relatively close.
Chart 27: 2Ws most stable across cycles, PVs more cyclical than 2Ws
Volume growth (%)
65
GDP FY98: 4.8%, up
~230bps over 2 years
50
GDP FY09 6.7%, up
~170bps over 2
years
GDP FY03: 6.8%, up
~420bps over 2
years
35
20
5
PV industry growth YoY
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
(10)
2W industry growth YoY
Source: SIAM, CMIE, Edelweiss research
29
Edelweiss Securities Limited
Automobiles
Chart 28: CVs are most cyclical in nature and witnessed sharpest recovery in upcycles
Volume growth (%)
60
40
GDP FY09 6.7%, up
~170bps over 2 years
GDP FY98: 4.8%, up
~230bps over 2 years
20
0
GDP FY03: 6.8%, up
~420bps over 2
years
(20)
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
(40)
M&HCV industry growth YoY
Source: SIAM, CMIE, Edelweiss research
Anecdotal data indicates likelihood of a marked improvement in margins (200bps plus)
across 4Ws over the next 2 years following the trough GDP year. The CV space is the
most cyclical from margin perspective, driven by higher volatility in volumes.
EBITDA Margin change (bps)
Chart 29: Segment-wise change in EBITDA margins seen in previous cycles
820
620
420
220
20
(180)
FY98-00
FY03-05
PV
2W
FY09-11
FY17-19E
M&HCV
Source: Companies, Edelweiss research
Empirical evidence indicates that the sector is an early cycle play with maximum stock
outperformance in the initial phase of economic recovery (before volume recovery sets in).
The best time to invest in auto stocks is in the trough GDP quarter. Stock returns are
maximised when invested in the trough/3 months post the trough GDP quarter
30
Edelweiss Securities Limited
Automobiles
Chart 31: Avg. stock returns 3m after trough quarter
200.0
Excess retun over Sensex (%)
Excess retun over Sensex (%)
Chart 30: Avg. stock returns in trough quarter
200
160
160.0
120
120.0
80
40
0
80.0
40.0
0.0
TMT
AL
+6M
M&M
+12M
HMCL
BJAUT
TMT
AL
+6M
+24M
M&M
+12M
HMCL
BJAUT
+24M
Source: Bloomberg, Edelweiss research
160.0
120.0
80.0
40.0
0.0
Chart 33: Avg. stock returns 12m after trough quarter
200.0
Excess retun over Sensex (%)
Excess retun over Sensex (%)
Chart 32: Avg. stock returns 6m after trough quarter
200.0
160.0
120.0
80.0
40.0
0.0
TMT
AL
+6M
M&M
+12M
HMCL
+24M
BJAUT
TMT
AL
+6M
M&M
+12M
HMCL
BJAUT
+24M
Source: Bloomberg, Edelweiss research
•
31
Structurally higher margin band: While there is a cyclical element to margins - there
has been sustained step-up in sectors margins and cash flows in past few cycles - we
believe these are now more structural. Just as this has raised the sector’s profitability,
we believe it raises valuations for autos, going forward. For MSIL, EIM, AL, their rising
business positioning and dominance, the re-rating can be higher.
Edelweiss Securities Limited
Automobiles
Chart 34: EBITDA margin trend during cycles
20.0
Margin (%)
16.0
12.0
8.0
4.0
PV
2W
FY19E
FY18E
FY17
FY16
FY15
FY14
FY11
FY10
FY09
FY05
FY04
FY03
FY00
FY99
FY98
0.0
M&HCV
Source: Companies, Edelweiss research
•
Drawing parallels: The market and other B2C businesses - The Indian market has rerated – is trading ~1SD above its mean, and while there can be debates on it, it does
raise the base framework. Various consumer facing businesses (from financials to
commodities) have re-rated even more aggressively, and consistently. For autos, the rerating is clearly visible in MSIL, EIM and HMCL. However, there exists further scope of
re-rating as MSIL and EIM, when one compares their industry dynamics and positioning
with other consumer facing businesses. A case in point is Asian Paints (APL), which
trades at ~45x (on 1 year forward PER). While there are some fundamental differences
(and we are not using APL as a benchmark), it’s worth noting that market share and
RoIC of MSIL and EIM are similar or better and revenue & EBITDA growth have actually
been stronger in the past 4 years versus APL. That APL trades at almost 2x of MSIL and
1.5x of EM suggests that the valuation benchmarks for autos will be shifting, and more
favourably and higher. A similar comparison with the consumer durables index
reiterates that MSIL and EIM’s revenue/EBITDA growth and RoIC are superior. Despite
this, valuations for MSIL and EIM are at a discount to the consumer durables index.
Table 15: Auto sector trading at premium
Auto - 12m fwd P/E
MSCI India
AL
EIM
TTMT
BJAUT
MM
MSIL
HMCL
Current
10 yr Average
+1 SD
17.5
18.5
33.8
12.0
18.9
20.8
25.2
19.3
15.5
13.7
22.8
8.5
13.8
15.4
15.9
13.4
17.9
19.2
32.6
10.9
17.0
18.5
20.1
15.8
Number of SD
expensive
0.8
0.88
1.13
1.43
1.59
1.75
2.22
2.51
Source: Bloomberg
32
Edelweiss Securities Limited
Automobiles
Food For Thought
What’s so great about Asian Paints? Are Eicher and Maruti heading there?
We compared APL with MSIL and EIM on various parameters to understand the key
reasons why APL trades at significant premium despite EIM/MSIL having superior EBITDA
growth, and higher RoIC in past 3/6 years. Interesting to note is that industry dynamics are
either better or similar in case of EIM/MSIL vis-a-vis APL. EIM stands out as a far superior
business on all fronts – market share, earnings growth, RoIC and RoE. Even so, it trades at a
significant discount to APL.
Finding 1: APL trades at significant premium to EIM/MSIL
The point to note is that APL rerated during FY12-17, when its RoE or RoIC was under
pressure.
Chart 35: 1-year forward – PER comparison
63
Multiple (x)
51
39
26
14
MSIL
Asian Paints
Eicher
Mar-17
Sep-16
Mar-16
Sep-15
Mar-15
Sep-14
Sep-13
Mar-14
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Sep-08
Mar-09
Mar-08
Sep-07
Mar-07
2
Consumer durables
Source: Capitaline, Edelweiss research
Note: Consumer durables index is composed of the following stocks: Havells, Voltas, Finolex
Cables, KEI Industries, V Guard, Symphony, Whirlpool, Bajaj Electricals and Crompton Greaves
Finding 2: RoIC of APL inferior to that of MSIL/EIM
APL re-rated during FY12 (from 24x PE to 45x currently), despite pressure on its RoIC and
RoE. While RE’s RoE/RoIC continue to be far superior than APL’s, MSIL’s RoIC, which has
been improving, has already surpassed APL’s. Despite this, APL trades at a significant
premium.
33
Edelweiss Securities Limited
Automobiles
Table 16: RoIC (pre-tax): EIM far ahead, MSIL crossing APL
RoIC(Pre-tax)
FY11
FY12
MSIL
51.0
22.8
Asian Paints
99.9
90.2
RE
(1,966.3)
661.4
Consumer Durables
38.1
33.4
FY13
FY14
FY15
FY16
FY17
27.9
30.6
42.2
61.1
78.2
71.1
60.6
61.8
65.0
59.7
(397.0)
(358.4)
(712.2)
9,111.8
1,230.6
29.6
32.2
45.0
47.4
53.3
Note: RE had negative RoIC in FY11 due to negative invested capital driven by negative working capital
Table 17: RoE comparison: MSIL RoE affected due to higher cash accumulation
RoE
FY11
FY12
FY13
FY14
MSIL
17.8
11.3
14.2
13.9
Asian Paints
42.97
39.39
36.06
33.3
RE
17.6
25.0
24.8
38.4
Consumer Durables
25.0
22.0
20.1
20.9
FY15
16.3
32.51
54.4
29.1
FY16
20.0
31.41
61.8
29.3
FY17
22.2
27.84
51.4
28.3
Finding 3: Market positioning of APL is similar to that of MSIL, but inferior to EIM
The market construct is largely similar between APL and MSIL. But, EIM is in a far superior
position at the moment. Market share of APL and MSIL is ~50%, with the number 2 player
at sub 20%. EIM is a virtual monopoly currently. Asset turn (sales/gross block) of APL is
lower than that of MSIL and EIM.
Table 18: Competitive positioning: APL similar to MSIL
APL
Market share (%)
Company
50
Challenger
18
Top 4 Players
85
Margin (%)
Company
19.8
Challenger
15.5
Organised
70-75
MSIL
EIM
47
17
78
96
n/a
100
15.2
10.1
100
31.3
n/a
100
Source: Edelweiss research
Finding 4: APL lags MSIL/EIM in revenue/EBITDA growth
While EIM has been a runaway success, even MSIL has been able to perform much better
than APL in recent years. The sharp volatility in MSIL’s revenue and EBIDT during FY12-14
was due to labour related issues and currency volatility.
Table 19: Revenue and EBIDTA trend: MSIL/EIM’s superior growth profiles
Revenues
Maruti
Asian Paints
RE
Consumer Durables
EBITDA
Maruti
Asian Paints
RE
Consumer Durables
FY11
FY12
FY13
FY14
FY15
FY16
FY17
CAGR FY11-FY17
24.9
15.6
16.9
25.3
(2.8)
24.7
51.9
12.2
22.5
13.6
56.7
12.4
0.6
16.2
62.4
12.5
13.7
11.5
77.8
9.2
15.5
0.6
73.8
7.5
18.2
7.1
33.8
11.0
10.9
12.1
58.7
10.8
(0.5)
8.2
64.0
22.0
(30.9)
13.6
74.9
4.5
68.3
14.8
81.6
3.4
19.9
15.4
115.7
14.1
28.2
11.9
133.8
22.8
36.7
23.9
100.5
17.8
16.5
9.1
50.0
15.2
19.0
14.7
90.8
12.8
Source: Capitaline, Edelweiss research
34
Edelweiss Securities Limited
Automobiles
•
Our stock picks: We believe, AL offers value at current juncture, given uncertainty with
respect to top-down demand outlook. But, the strong free cash flow, market share gain
story and relative valuations limit downside. We also like EIM and MSIL as structural
stories for dominant positioning and opportunity size. Worth noting is that AL, with
~65% utilisation, is well geared for a cyclical up-turn. However, MSIL/EIM will face
capacity constraints (and hence lose market share), if there is a sharp cyclical recovery
in demand
We are raising our target multiples across stocks factoring in the cyclical volume
recovery and company-specific tailwinds.
Table 20: Valuations - Scope for further re-rating
Multiples
Company
Ashok Leyland
Methodology
EV/EBITDA
Bajaj Auto
Eicher Motors
Royal Enfield
EPS CAGR
(FY17-19)
FCF CAGR
(FY17-19)
24.4
13.2
FCF as %
revenues
(FY17-19)
8.8
Volume
CAGR
FY17-19 Comments
11.0 Clarity with respect to industry volume
recovery will drive re-rating
Old
10x
New
11x
Core P/E
16.5x
17.5x
13.7
8.3
13.7
10.6 Reflects positive momentum in domestic
business only
Core P/E
27x
30x
41.4
85.1
19.8
Reported P/E
17x
17x
21.1
23.7
1.7
Hero Motocorp
Core P/E
17x
19x
13.1
10.4
9.6
M&M
Core P/E
14x
15x
13.2
n/a
5.5
29.2 Capacity contraints restrict volume
growth
9.1 Clarity with respect to industry volume
recovery will drive re-rating
10.2 Factoring in better rural recovery and
push in scooters
10.1 Further re-rating depends on UV recovery
Maruti Suzuki
Core P/E
21x
27x
19.9
28.6
9.5
8x
8x
n/a
n/a
(0.5)
5.5x
5.5x
32.9
100.2
3.6
VECV
Tata Motors EV/EBITDA
Standalone
Tata Motors - JLR EV/EBIT
12.4 Capacity contraints restrict volume
growth
8.3 Re-rating will be driven by further
improvement in free cash profile
11.2 Re-rating will be driven by further
improvement in free cash profile
Source: Edelweiss research
35
Edelweiss Securities Limited
Automobiles
Our Preferred Allocation in the Sector
Chart 36: Our preferred allocation
M&M
13%
TTMT
5%
AL
12%
BJAUT
5%
EIM
20%
MSIL
40%
HMCL
5%
Source: Edelweiss research
Table 21: Sector weight (Based on market capitalisation) and our preferred allocation
Company
AL
BJAUT
EIM
HMCL
MSIL
M&M
TTMT
Total
Market Cap Market Cap Weight
(USDmn)
(%)
4,591
12,382
11,797
11,439
34,381
13,282
21,333
109,205
Our Preferred
allocation (%)
4.2
11.3
10.8
10.5
31.5
12.2
19.5
100
12.0
5.0
20.0
5.0
40.0
13.0
5.0
100
Source: Edelweiss research
36
Edelweiss Securities Limited
COMPANY UPDATE ASHOK LEYLAND
Aiming for the top spot
India Equity Research| Automobiles
We believe Ashok Leyland (AL) has emerged as a credible challenger in the CV space with remarkable market share gains (M&HCV market share gain from 26.2% to 33.8% in 4 years). We expect the march to continue driven by: a) strong response to new launches (Guru, Sunshine); b) sustained network expansion (5x over FY12‐17); and c) focused after sales. Non‐cyclical high‐margin businesses to gain traction – wider technical capabilities in defence, scale in spares business and focused exports strategy. We believe, this business momentum and AL’s focus on profitability should drive already industry leading margins, RoE and stock performance. Maintain ‘BUY’. New products and deepening reach: Market share gain catalysts AL has been plugging the gaps in its product portfolio as well as sprucing up its distribution reach in the past 5 years. This has led to the company posting healthy market share gains (up ~770 bps in past 4 years), and we expect this momentum to sustain on improving brand equity. Also, leader TTMT’s muted RoCE (‐1.9% in FY17 versus AL’s 25%) and margin (2.8% versus AL’s 11%) rule out unhealthy competition in the CV space and paves the way for continued market share gains for AL. De‐risking to prop margins EDELWEISS 4D RATINGS Absolute Rating BUY
Rating Relative to Sector Outperform
Risk Rating Relative to Sector High
Sector Relative to Market Underweight
MARKET DATA (R: ASOK.BO, B: AL IN) CMP : INR 105 Target Price : INR 135 52‐week range (INR) : 109 / 73 Share in issue (mn) : 2,926.5 M cap (INR bn/USD mn) : 308 / 4,775 Avg. Daily Vol.BSE/NSE(‘000) : 12,112.0 SHARE HOLDING PATTERN (%)
Current
50.4
50.4 MF's, FI's & BK’s
9.9
8.9 8.7 FII's
17.9
11.9 10.0 Others
21.9
28.8 30.9 PRICE PERFORMANCE (%)
Outlook and valuations: On firm footing; maintain ‘BUY’ 12 months Financials Year to March Revenues Rev. growth (%) Adjusted Profit Basic shares outstanding (mn) Adjusted diluted EPS (INR) EPS Growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY16 189,373 39.6 7,715 2,846 1.4 229.9 76.8 13.4 14.7 50.4 :
* Promoters pledged shares (% of share in issue) AL’s focus on garnering high margins (spares, defence and exports) with an eye on reducing share of cyclical M&HCV business is a potent margin trigger. Exports strategy of: (1) increasing local presence; (2) entry into specific product segments; and (3) pricing products closer to Japanese peers improves chances of success. In defence, AL has widened its products offering to 6x6, 8x8 and 10x10 from traditional 4x4 offerings. AL’s focus on widening product offerings and expanding its reach will propel current 15‐year high market share and industry leading RoE. We estimate 24.4% EPS CAGR and RoE at 26.4% (up ~520bps) over FY17‐19. We upgrade our target FY19 EV/EBIDTA multiple to 11x (from 10x) given that AL is an early cycle play. Maintain ‘BUY/SO’ with SoTP based TP of INR135. At CMP, the stock trades at FY19 PER of 15.6x Q3FY17 Q2FY17
Promoters * 17.8
EW Auto
Index Stock Nifty 1 month 11.0 1.0 3 months 27.8 6.4 7.4 12.3 17.4 21.6 (2.2)
(INR mn)
FY17E
200,187
5.7
15,585
2,846 4.3
213.9
24.5
13.2
21.2
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. FY18E
241,260
20.5
14,547
2,846
5.1
18.9
20.6
11.4
22.6
FY19E
276,354
14.5
18,936
2,846
6.7
30.2
15.8
8.8
26.4
Chirag Shah +91 22 6623 3367 [email protected] Karthik Subramaniam +91 22 6620 3156 [email protected] July 10, 2017 Edelweiss Securities Limited Automobiles Chart 1: Demand shifting to higher tonnage… 100 12 12 14 21 28 27 39 37 23 20 22 9 9 10 FY15
FY16
FY17
Tonnage mix (%)
80 41 37 38 60 40 40 27 20 26 28 12 14 13 FY12
FY13
FY14
0 7.5 ‐ 12T
12 ‐ 16T
16 ‐ 25T
>25T (Rigid and tractor trailers)
>35T
Source: SIAM, Edelweiss research Chart 2: … benefitting AL given its strong positioning in >35T segment 50 Market share (%)
44 38 32 26 20 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
16‐25T (incl rigid vehicles)
>35T TT
26‐35T TT
Total M&HCV Goods
Source: SIAM, Edelweiss research 38 Edelweiss Securities Limited Ashok Leyland
5,000 (20)
0 (50)
Exports revenues
FY17
FY11
YoY growth (RHS)
YoY growth (%)
10 FY16
10,000 FY15
40 FY14
15,000 FY13
70 FY12
(50)
Revenues (INRmn)
0 YoY growth (%)
(30)
20,000 FY17
5,000 FY16
(10)
FY15
10,000 FY14
10 FY13
15,000 FY12
30 Spares revenues
Chart 4: New markets and focused launches to drive exports 100 25,000 50 20,000 FY11
Revenues (INRmn)
Chart 3: Spares business re‐gaining traction 25,000 YoY growth (RHS)
Source: Company, Edelweiss research Table 1: AL has addressed product gaps particularly across LCV and ICV segments which drove market share gains Tonnage Segment
Ashok Leyland (FY11)
Ashok Leyland (FY17)
Market leader(FY17)
Volume Market Volume Market Volumes
Volumes
Company
mix (%) share (%)
mix (%) share (%)
<2T (mini trucks)
2 ‐ 3.5T (Pick up trucks)
3.5 ‐ 7.5T
7.5 ‐ 12T
12 ‐ 16T
16 ‐ 25T
>25T (Rigid vehicles)
26 ‐ 35T (Tractor trailer)
>35T (Tractor trailer)
Total
LCV Goods (Up to 7.5T)
M&HCV Goods (>7.5T)
LCV Bus (Up to 7.5T)
M&HCV Bus (>7.5T)
Total LCV
Total M&HCV
Total CV
0
0
1
2,810
16,039
22,969
11,595
4,368
4,892
62,674
1
62,673
701
20,425
702
83,098
83,800
0.0
0.0
0.0
4.5
25.6
36.6
18.5
7.0
7.8
100.0
0.0
74.8
0.8
24.4
0.8
99.2
100.0
0.0
0.0
0.0
5.1
26.4
26.9
26.1
34.0
30.2
10.6
0.0
22.8
1.6
42.8
0.2
25.7
12.3
0
30,463
235
8,901
17,071
20,499
14,052
6,382
17,683
115,286
30,698
84,588
253
17,725
30,951
102,313
133,264
0.0
26.4
0.2
7.7
14.8
17.8
12.2
5.5
15.3
100.0
23.0
63.5
0.2
13.3
23.2
76.8
100.0
0.0
14.6
0.6
20.1
37.8
32.7
27.9
42.5
46.8
18.7
8.5
33.1
0.5
37.5
7.5
33.8
18.7
Tata Motors
M&M
Tata Motors
VECV
Tata Motors
Tata Motors
Tata Motors
AL
Tata Motors
Tata Motors
M&M
Tata Motors
Force Motors
Tata Motors
M&M
Tata Motors
Tata Motors
Industry (FY17)
Market Volume Tonnage Volumes
Volumes
share (%)
mix (%) mix (%)
82,766
137,511
19,649
17,502
23,157
36,105
32,852
6,382
18,012
273,776
155,702
141,877
21,320
14,917
158,202
156,794
304,089
71.4
65.9
54.1
39.6
51.3
57.6
65.1
42.5
47.7
44.4
43.1
55.6
41.9
31.6
38.4
51.8
42.6
115,961
208,542
36,339
44,235
45,122
62,649
50,426
15,018
37,751
616,043
360,842
255,201
50,862
47,262
411,704
302,463
714,167
18.8
33.9
5.9
7.2
7.3
10.2
8.2
2.4
6.1
100.0
50.5
35.7
7.1
6.6
57.6
42.4
100.0
1.8
8.5
3.0
4.5
8.3
19.1
25.7
6.1
23.1
100.0
13.2
86.8
n/a
n/a
n/a
n/a
n/a Source: Companies, Edelweiss research Table 2: Valuation snapshot (INR mn)
EBITDA
EV/EBITDA
Enterprise value
Net debt
Equity value
No. of shares
Value of core business (INR)
Hinduja Finance ‐ 57% stake valued at 2.5x FY16 BV (INR)
Target price (INR)
FY19E
30,797
11.0
338,772
(29,728)
368,500
2,846
129
6
135 Source: Edelweiss research
39 Edelweiss Securities Limited Automobiles Company Description Ashok Leyland (AL) is the second largest commercial vehicle manufacturer in India. The Hinduja Group holds 51% stake in the company through the holding company, Hinduja Automotive (UK). The company has 6 manufacturing plants across 5 locations in India — Ennore (Tamil Nadu), Hosur (Tamil Nadu), Alwar (Rajasthan), Bhandara (Maharashtra) and Pantnagar (Uttaranchal). It focuses on the M&HCV segment with significant presence in bus segment. Investment Theme AL is a pure play on the M&HCV segment. The company has been a key beneficiary of sharp recovery in higher tonnage segment/South region and has commendably improved balance sheet (better FCF/ lower debt). We expect market share gains to sustain led by expanding product portfolio in small and intermediate ICV segment and expansion of dealership network across non‐South regions. Sharpening focus on high margin‐businesses like spares, defence and exports is a potent margin trigger. Additionally, sharp recovery in demand over FY16‐19E versus our 9% estimate will aid further margins. Key Risks Success of new technology: AL has adopted the EGR technology to comply with BSIV norms. While globally EGR is being used for vehicles up to 180HP (and beyond that SCR), Al has decided to use the technology for its entire range (up to > 400HP trucks). Given that the technology is one of its kinds, it is a double edge sword for AL. If successful, it will enable the company to gain significant market share or else, there will be sharp pressure on cash flows and profitability. Exports/Defence: We believe success in these areas will be critical for sustained valuation re‐rating of the stock. While we are not factoring in a sharp increase in either of them, development on these fronts will be keenly tracked by markets. 40 Edelweiss Securities Limited Ashok Leyland
Financial Statements Key Assumptions Year to March FY16 FY17 FY18E
GDP(Y‐o‐Y %) Inflation (Avg) 7.2 4.9 6.5 4.8 7.1
5.0
7.7
5.2
Repo rate (exit rate) 6.8 6.3 6.3
6.3
65.0 67.5 67.0
67.0
1,600 1,600 48.7 3.5 Macro USD/INR (Avg) Sector Aluminium prices (USD/t) Company MHCV ‐ domestic vol (% YoY) Avg realisation (INR) Avg realisation (% YoY) RM cost/vehicle Employee cost/vehicle Average salary Promotion cost (% revenue) EBITDA/vehicle Avg. Interest rate (%) Depreciation rate (%) FY19E
940,086 98,681 2.3 Year to March
FY16 FY17
FY18E
FY19E
189,373 200,187
131,949 139,573
241,260
173,095
276,354
197,271
Income from operations
Materials costs
Manufacturing expenses
Employee costs
Total SG&A expenses
Total operating expenses
1,675
1,700
EBITDA
9.9
13.7
10.0
1.9
(INR mn)
2,425 2,480
2,846
3,149
13,851 15,309
17,616
20,246
18,603 20,799
22,925
24,890
166,827 178,161
216,482
245,556
30,797
22,546 22,025
24,777
4,879 5,179
5,373
5,631
EBIT
17,667 16,846
19,405
25,167
Add: Other income
1,176.2 1,362.7 2,347.27 2,879.27
Depreciation
1,349,214 1,379,969 1,517,844 1,547,163
4.4 Income statement
Less: Interest Expense
2,476 1,554
670
602
(8,102) (3,354)
‐
‐
27,444
962,132 1,089,001 1,104,420
Add: Exceptional items
105,534 Profit Before Tax
8,265 13,301
21,082
Less: Provision for Tax
4,369 1,070
6,536
8,507
Reported Profit
3,896 12,231
14,547
18,936
110,826
113,347
1,351,185 1,391,721 1,579,603 1,737,563
2.3 2.2 2.1
2.2
160,634 151,830 155,883
172,419
(3,819) (3,354)
‐
‐
14.8 7.0 7.0
6.5
Adjusted Profit
7,715 15,585
14,547
18,936
Shares o /s (mn)
2,846 2,846
2,846
2,846
2.7 5.5
5.1
6.7
2,846 2,846
2,846
2,846
Adjusted Diluted EPS
1.4 4.3
5.1
6.7
Adjusted Cash EPS
3.1 6.1
7.0
8.6
Exceptional Items
5.7 6.5 6.5
6.5
Tax rate (%) 52.9 8.0 31.0
31.0
Adjusted Basic EPS
Dividend payout (%) 42.2 44.0 56.0
56.0
Diluted shares o/s (mn)
(15,037) (5,011) ‐
‐
1,208 3,783 3,000
4,000
Debtor days 24 19 14
15
Dividend per share (DPS)
1.0 2.0
2.4
3.1
Inventory days 41 53 57
58
Dividend Payout Ratio(%)
42.2 44.0
56.0
56.0
Net borrowings (INR mn) Capex (INR mn) Payable days 123 137 130
134
Cash conversion cycle (58) (65) (59)
(61)
Common size metrics
Year to March
FY16 FY17
FY18E
FY19E
Operating expenses
Materials costs
88.1 69.7 89.0
69.7
89.7
71.7
88.9
71.4
Staff costs
7.3 7.6
7.3
7.3
S G & A expenses
9.8 10.4
9.5
9.0
Depreciation
2.6 2.6
2.2
2.0
Interest Expense
1.3 0.8
0.3
0.2
EBITDA margins
11.9 11.0
10.3
11.1
4.1 7.8
6.0
6.9
Net Profit margins
Growth ratios (%)
Year to March
FY16 FY17
FY18E
FY19E
Revenues
EBITDA
39.6 119.6 5.7
(2.3)
20.5
12.5
14.5
24.3
PBT
86.9 60.9
58.5
30.2
Adjusted Profit
229.9 213.9
18.9
30.2
EPS
229.9 213.9
18.9
30.2
41 Edelweiss Securities Limited Automobiles Balance sheet As on 31st March (INR mn)
Cash flow metrics
Year to March
FY16 FY17
FY18E
FY19E
FY16 FY17 FY18E
FY19E
Share capital Reserves & Surplus 2,846 51,226 2,846 58,415 2,846
64,814
2,846
73,144
Operating cash flow
Investing cash flow
16,756 21,548
3,876 (14,768)
25,917
(25,063)
26,764
(15,121)
Shareholders' funds 54,071 61,261 67,660
75,990
Financing cash flow
(12,332) (13,719)
(8,818)
(11,209)
Short term borrowings 18,210 11,463 11,463
11,463
Net cash Flow
Long term borrowings 250 1,986 1,986
1,986
18,460 13,450 13,449
13,449
3,290 1,268 1,268
1,268
Sources of funds 75,822 75,978 82,377
90,707
Profitability and efficiency ratios
Gross Block Net Block 87,469 48,131 90,469 50,190 93,469
47,818
97,469
46,187
Year to March
FY16 547 1,576 1,576
1,576
ROAE (%)
ROACE (%)
14.7 24.0 Total Fixed Assets 48,678 51,766 49,394
47,763
Inventory Days
Non current investments 19,804 14,769 23,179
25,179
Debtors Days
Cash and Equivalents 15,627 22,706 30,742
43,177
Inventories 16,250 25,011 29,785
Sundry Debtors 12,511 8,601 10,242
Total Borrowings Def. Tax Liability (net) Capital work in progress Loans & Advances 1,682 35 41
8,300 (6,939)
(7,964)
435
(1,208) (3,783)
(3,000)
(4,000)
3,254 6,850
8,148
10,606
FY17
FY18E
FY19E
21.2
24.7
22.6
27.9
26.4
32.9
41 53
57
58
24 19
14
15
Payable Days
123 137
130
134
34,128
Cash Conversion Cycle
(58) (65)
(59)
(61)
11,736
Current Ratio
1.1 1.2
1.1
1.2
Gross Debt/EBITDA
0.8 0.6
0.5
0.4
0.3 0.2
0.2
0.2
47
Capex
Dividend paid
Other Current Assets 13,184 15,108 15,108
15,108
Gross Debt/Equity
Current Assets (ex cash) 43,627 48,754 55,177
61,019
Adjusted Debt/Equity
0.3 0.2
0.2
0.2
Trade payable 48,797 55,847 67,860
76,974
Net Debt/Equity
0.1 (0.2)
(0.3)
(0.4)
Interest Coverage Ratio
7.1 10.8
29.0
41.8
Other Current Liab 3,119 6,169 8,254
9,458
Total Current Liab 51,916 62,016 76,114
86,432
Net Curr Assets‐ex cash (8,288) (13,262) (20,938)
(25,412)
Uses of funds 75,822 75,978 82,377
90,707
15.4 17.9 20.2
23.1
BVPS (INR) Free cash flow Year to March FY16 FY17 FY18E
FY19E
Reported Profit Add: Depreciation 3,896 4,879 12,231 5,179 14,547
5,373
18,936
5,631
Interest (Net of Tax) 1,167 1,429 462
416
Others 17,076 6,656 13,210
Less: Changes in WC 10,262 3,947 7,675
Operating cash flow Less: Capex Free Cash Flow (INR mn)
Operating ratios
Year to March
FY16 FY17
FY18E
FY19E
Total Asset Turnover
Fixed Asset Turnover
2.3 3.8 2.6
4.1
3.0
4.9
3.2
5.9
Equity Turnover
3.6 3.5
3.7
3.8
Valuation parameters
Year to March
FY16 FY17
FY18E
FY19E
6,257
Adj. Diluted EPS (INR)
Y‐o‐Y growth (%)
1.4 229.9 4.3
213.9
5.1
18.9
6.7
30.2
4,475
Adjusted Cash EPS (INR)
16,756 21,548 25,917
1,208 3,783 3,000
26,764
4,000
15,548 17,765 22,917
22,764
3.1 6.1
7.0
8.6
76.8 24.5
20.6
15.8
P/B (x)
6.8 5.9
5.2
4.5
EV / Sales (x)
1.6 1.5
1.2
1.0
13.4 0.9 13.2
1.9
11.4
2.3
8.8
2.9
Diluted P/E (x)
EV / EBITDA (x)
Dividend Yield (%)
Peer comparison valuation Market cap
Name Ashok Leyland Diluted P/E (X)
EV / EBITDA (X)
(USD mn)
FY18E
FY19E
FY18E
P/B (X)
FY19E FY18E
FY19E
4,775
20.6
15.8
11.4
8.8 5.2
4.5
Mahindra & Mahindra Ltd 13,179
19.7
17.6
12.4
10.9 2.9
2.5
Tata Motors Ltd 22,142
11.2
9.1
4.7
4.0 2.1
1.7
Median ‐
19.7
15.8
11.4
8.8 2.9
2.5
AVERAGE ‐
17.2
14.2
9.5
7.9 3.4
2.9
Source: Edelweiss research
42 Edelweiss Securities Limited Ashok Leyland
Additional Data Directors Data Dheeraj G. Hinduja Vinod K Dasari Anup Bhat C. G. Belsare N V Balachandar Non Executive Chairman Managing Director Executive Director Executive Director Executive Director R. Seshasayee
Anuj Kathuria
B. Venkat Subramaniam
Gopal Mahadevan
Nitin Seth
Non Executive Vice Chairman
Executive Director Executive Director Chief Financial officer Executive Director Auditors ‐ Delloitte Haskins & Sells *as per last annual report
Holding – Top10
Perc. Holding 32.79
4.61
2.39
1.83
1.31
Hinduja automotive l Jpmorgan chase & co Morgan stanley Government pension f Blackrock Amas bank switzerlan
Life insurance corp
Norges bank
Abu dhabi investment
Kuwait investment au
Perc. Holding 4.95
3.6
2.04
1.39
1.21
*in last one year
Bulk Deals
Data No Data Available Acquired / Seller B/S
Qty Traded
Price *in last one year Insider Trades
Reporting Data 04 Aug 2016 Acquired / Seller K Ram Kumar
B/S Sell
Qty Traded 20500.00 *in last one year
43 Edelweiss Securities Limited Automobiles THIS PAGE IS INTENTIONALLY LEFT BLANK 44 Edelweiss Securities Limited COMPANY UPDATE BAJAJ AUTO Domestic sorted; exports hazy
India Equity Research| Automobiles Bajaj Auto (BJAUT) has managed to regain domestic motorcycle market share in FY16‐17 riding new launches, post 5 years of market share loss (FY11‐15). In our view, series of differentiated launches (V150/V120, Avenger 150/220 etc) will also enable the company improve its motorcycle margins. However, lack of presence in scooters, elusive export revival and strengthening USD/INR will restrict overall earnings momentum. Domestic 3W demand will be driven by new permits. We maintain ‘HOLD’. However, given that domestic 2W is an early cycle play, we raise our target core PE multiple to 17.5x (16.5x, earlier), with a revised TP of INR2,957 (INR2,904 earlier) Absolute Rating HOLD
Rating Relative to Sector Underperform
Risk Rating Relative to Sector Low
Sector Relative to Market Underweight
MARKET DATA (R: BAJA.BO, B: BJAUT IN) CMP : INR 2,729 Target Price : INR 2,957 52‐week range (INR) : 3,122 / 2,510 Share in issue (mn) : 289.4 Domestic motorcycle market share gains sustain M cap (INR bn/USD mn) : 790 / 12,238 From a low of 16.5% in FY15 (post poor performance in Discover family), BJAUT has steadily recouped motorcycle market share (18% in FY17), riding the success of new launches (Avenger, V150, Platina). Value market share will however, be higher in our view, given the company’s focus on premium segment (>150cc). Going forward, we expect ramp up in V12, Pulsar upgrades and Dominar to bolster market share. In exports, weak macros continue to drag volume recovery. Volume uptick in Egypt, Nigeria and Sri Lanka is critical for double digit exports growth. Margins to remain flat BJAUT has maintained its guidance of ~20% margins for FY18. While we perceive near term margin headwinds given the commodity cost pressure and appreciation in USD/INR, this should be offset, to some extent, by an improving product mix. Outlook and valuations: Balanced risk reward; maintain ‘HOLD’ EDELWEISS 4D RATINGS We estimate volume/EPS CAGR of 11%/14% over FY17‐19. BJAUT has delivered margin of ~20% and RoE of 25%, despite subdued volumes in past 2 years (2% dip in CAGR). We maintain ‘HOLD/SU’ with TP of INR2,957 (17.5x FY19E core EPS, cash per share of INR636 and INR80 for KTM). At CMP, the stock trades at 16x FY19E EPS. Financials Year to March Revenues Rev. growth (%) Adjusted Profit Basic shares outstanding (mn) Adjusted diluted EPS (INR) EPS Growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY16 225,865 4.5 39,297 289 135.8 16.1 20.1 14.5 32.8 Avg. Daily Vol.BSE/NSE(‘000) : 286.7 SHARE HOLDING PATTERN (%)
Current
Q3FY17 Q2FY17
Promoters * 49.3
49.3 MF's, FI's & BK’s
7.7
8.4 8.2 FII's
17.4
17.6 17.8 Others
25.6
24.7 24.7 49.3 :
* Promoters pledged shares (% of share in issue) 0.9
PRICE PERFORMANCE (%)
Stock Nifty EW Auto
Index 1 month (4.8) 1.0 3 months (3.8) 6.4 (2.2)
7.4 12 months 4.8 17.4 21.6 (INR mn)
FY17E
217,667
(3.6)
38,276
289 132.3
(2.6)
20.6
14.8
25.3
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. FY18E
249,974
14.8
44,800
289
154.8
17.0
17.6
12.0
24.9
FY19E
276,313
10.5
49,525
289
171.1
10.5
15.9
10.4
24.9
Chirag Shah +91 22 6623 3367 [email protected] Karthik Subramaniam +91 22 6620 3156 [email protected] July 10, 2017 Edelweiss Securities Limited Automobiles Chart 1: Market share fall arrested, value market share should be higher than volume market share 30.0 2416K 2567K 2468K 2106K 1771K 1898K 2001K
100 80 Volume share (%)
24.0 21.0 18.0 51
53
30
40
42
42
40 51
48
31
13
17
16
21
20
22
29
46
42
FY11
FY12
FY13
FY14
FY15
FY16
FY17
0 Entry
Chart 2: Export mix deteriorating as 3W share is declining 1580K
1547K
1584K
1806K
1739K
1411K
20
16
16
16
16
14
Revenues (INRmn)
60 84
84
84
86
20 100,000 55.0 90,000 40.0 80,000 25.0 70,000 10.0 60,000 (5.0)
(20.0)
50,000 0 FY16
FY12 FY13 FY14 FY15 FY16 FY17
FY17
3W
Export revenues
YoY growth (RHS)
Chart 4: EBITDA margins to remain flat; INR strength to be offset by improving mix 25.0 23.0 21.0 19.0 17.0 FY18E
FY17
FY16
FY15
15.0 FY13
2W
FY15
FY12
FY14
FY11
FY13
Margins (%)
FY12
EBITDA margins
FY19E
84
Premium
Chart 3: Export revenue growth remains under pressure 80 80
Executive
YoY growth (%)
Bajaj domestic motorcycle market share
Volume mix (%)
27
60 FY11 FY12 FY13 FY14 FY15 FY16 FY17
40 28
20 15.0 100 33
FY14
Market share (%)
27.0 Source: Edelweiss research 46 Edelweiss Securities Limited Bajaj Auto
Table 1: Valuation FY19E
128
17.5
2,241
636
80
2,957 Core EPS FY19E (INR)
Earnings multiple (x)
Fair value (INR)
Cash per share (INR)
Value of KTM per share (INR)
Total fair value per share (INR)
Source: Edelweiss research 47 Edelweiss Securities Limited Automobiles Company Description Bajaj Auto (BJAUT) is the second largest motorcycle manufacturer in India with domestic motorcycle market share of ~18%. BJAUT offers products in all motorcycle segments—
CT/Platina in entry, Discover and V12/V15 in executive and Pulsar, Avenger and Dominar in premium. The company is also the largest 3‐wheeler (3W) manufacturer in India. Post the demerger in May 2008, BJAUT has been solely focused on automobile business. In past few years, the company has shown strong growth in exports – constitutes ~40% of total volumes. Investment Theme BJAUT is a diversified play with domestic motorcycle, 3W and export portfolio. The company has managed to arrest the fall in domestic motorcycle market share by a series of differentiated new launches (V12/V15 and Avenger 150/220). However, we believe overall earnings momentum will be restricted owing to lack of presence in the fast‐growing scooter segment, elusive exports market revival and recent strengthening of the INR. Key Risks Transition from 150cc to > 250cc brand: BJAUT has not been able to move away from its traditional strong brand positioning. Given the shift in demand to >250cc, it is imperative for BJAUT to launch credible offerings in emerging categories. Else, its market share in the premium motorcycle market will come under threat. Exports: Success in new geographies becomes critical for sustainable volume growth, given weak demand outlook in its key traditional markets. Also, competitive intensity from Indian peers is expected to rise. 48 Edelweiss Securities Limited Bajaj Auto
Financial Statements Key Assumptions Year to March FY16 FY17 GDP(Y‐o‐Y %) Inflation (Avg) 7.2 4.9 6.5 4.8 7.1
5.0
7.7
5.2
Repo rate (exit rate) 6.8 6.3 6.3
6.3
65.0 67.5 67.0
67.0
Macro USD/INR (Avg) Sector Motorcycle ‐ Domestic 3‐wheeler (Passenger) ‐ Domestic Company FY18E
FY19E
Income statement
Year to March
FY16 FY17
Total volume (nos)
% Growth in volume
225,865 217,667
249,974
276,313
Materials costs
150,569 146,242
167,099
184,715
Manufacturing expenses
7,269 6,553
7,084
7,687
Employee costs
9,171 9,971
11,666
12,987
11,037 10,679
11,815
12,662
178,046 173,443
197,663
218,052
52,311
58,261
‐ 4.0 5.0
8.0
Total SG&A expenses
1.0 2.0 5.0
5.0
Total operating expenses
EBITDA
1.1 5.4 7.0
11.1
3‐wheeler (Passenger) ‐ Domestic 8.8 (0.7) 5.0
5.0
Motorcycle ‐ Exports (4.1) (16.5) 13.3
12.0
Add: Other income
3‐wheeler (Passenger) ‐ Exports (1.7) (31.1) 13.9
10.0
Less: Interest Expense
53,368 54,901 56,637
57,391
Avg realisation (% YoY) RM cost/vehicle Average salary Promotion cost (% revenue) EBITDA/vehicle Depreciation rate (%) FY19E
3,893,247 3,665,950 4,038,530 4,483,205
2.1 (5.8)
10.2
11.0
Income from operations
Motorcycle ‐ Domestic Avg realisation (INR) (INR mn)
FY18E
Depreciation
EBIT
47,819 44,224
3,072 3,073
3,393
3,597
44,748 41,151
48,917
54,663
10,735.9 12,219.7 14,633.33 15,589.19
11 14
5
5
Profit Before Tax
55,473 53,356
63,546
70,248
1.8 2.9 3.2
1.3
Less: Provision for Tax
16,177 15,081
18,746
20,723
38,674 39,892 41,376
41,202
Reported Profit
39,297 38,276
44,800
49,525
1,000,152 1,070,163 1,198,583 1,294,469
Adjusted Profit
39,297 38,276
44,800
49,525
289 289
289
289
135.8 132.3
154.8
171.1
2.1 2.1 2.1
2.0
12,283 12,063 12,953
12,995
Shares o /s (mn)
Adjusted Basic EPS
7.0 6.7 6.8
6.8
289 289
289
289
Tax rate (%) 29.2 28.3 29.5
29.5
Adjusted Diluted EPS
135.8 132.3
154.8
171.1
Dividend payout (%) 48.7 59.1 58.3
59.8
Adjusted Cash EPS
61 20 ‐
‐
613 2,838 3,000
3,000
Debtor days 12 14 13
12
Common size metrics
Inventory days 18 17 17
17
Year to March
Payable days 46 53 52
53
(17) (22) (23)
(24)
Operating expenses
Materials costs
B/S assumptions Net borrowings (INR mn) Capex (INR mn) Cash conversion cycle Diluted shares o/s (mn)
146.4 142.9
166.5
183.6
Dividend per share (DPS)
55.0 65.0
75.0
85.0
Dividend Payout Ratio(%)
48.7 59.1
58.3
59.8
FY16 FY17
FY18E
FY19E
78.8 66.7 79.7
67.2
79.1
66.8
78.9
66.9
Staff costs
4.1 4.6
4.7
4.7
S G & A expenses
4.9 4.9
4.7
4.6
Depreciation
1.4 1.4
1.4
1.3
‐ ‐
‐
‐
EBITDA margins
21.2 20.3
20.9
21.1
Net Profit margins
17.4 17.6
17.9
17.9
Interest Expense
Growth ratios (%)
Year to March
FY16 FY17
FY18E
FY19E
Revenues
EBITDA
4.5 13.2 (3.6)
(7.5)
14.8
18.3
10.5
11.4
PBT
34.2 (3.8)
19.1
10.5
Adjusted Profit
16.1 (2.6)
17.0
10.5
EPS
16.1 (2.6)
17.0
10.5
49 Edelweiss Securities Limited Automobiles Balance sheet As on 31st March FY16 FY17 (INR mn)
Cash flow metrics
Year to March
FY16 FY17
FY18E
FY19E
36,454 33,392
(189) (36,883)
39,365
(15,367)
38,853
(9,411)
(29,609)
FY18E
FY19E
Share capital Reserves & Surplus 2,894 2,894 2,894
129,772 167,448 186,127
2,894
206,047
Operating cash flow
Investing cash flow
Shareholders' funds 132,666 170,341 189,020
208,941
Financing cash flow
(33,841) (1,900)
(26,126)
Short term borrowings 1,179 1,199 1,199
1,199
Net cash Flow
2,425 (5,391)
(2,127)
(167)
Total Borrowings 1,179 1,199 1,199
1,199
Capex
(613) (2,838)
(3,000)
(3,000)
Def. Tax Liability (net) 2,028 3,136 3,136
3,136
Dividend paid
(19,155) (22,638)
(26,121)
(29,604)
135,872 174,677 193,355
213,276
Sources of funds Gross Block Net Block Year to March
FY16 FY17
FY18E
FY19E
19,449
ROAE (%)
ROACE (%)
32.8 45.9 25.3
35.0
24.9
35.1
24.9
35.1
12,832
12,832
Inventory Days
18 17
17
17
97,950 137,281 162,154
183,987
Debtors Days
12 14
13
12
46 53
52
53
(17) (22)
(23)
(24)
46,903 20,333 49,903
19,940
52,903
19,342
269 106 106
106
Total Fixed Assets 21,383 20,440 20,046
Non current investments 12,832 12,832 Cash and Equivalents Capital work in progress Profitability and efficiency ratios
43,903 21,114 Inventories 7,191 7,284 8,498
9,390
Payable Days
Sundry Debtors 7,179 9,533 8,498
9,390
Cash Conversion Cycle
Loans & Advances 365 362 415
459
4.5 5.2
5.1
5.2
Other Current Assets 17,965 20,418 20,418
20,418
Gross Debt/EBITDA
‐ ‐
‐
‐
Current Assets (ex cash) 32,700 37,596 37,828
39,656
Gross Debt/Equity
‐ ‐
‐
‐
Trade payable 20,270 22,357 25,479
28,107
Adjusted Debt/Equity
‐ ‐
‐
‐
Other Current Liab 8,723 11,115 14,025
14,539
Net Debt/Equity
(0.7) (0.8)
(0.9)
(0.9)
Total Current Liab 28,993 33,472 39,504
42,647
Interest Coverage Ratio
4,261.7 2,939.3
3,707 4,124 (1,676)
(2,991)
135,872 174,677 193,355
213,276
Net Curr Assets‐ex cash Uses of funds BVPS (INR) Free cash flow 458.5 Year to March 588.7 653.2
722.1
(INR mn)
FY16 FY17 FY18E
FY19E
39,297 3,072 38,276 3,073 44,800
3,393
49,525
3,597
7 10 4
4
Others (19,290) (8,383) (3,031)
(12,958)
Less: Changes in WC (13,369) (417) 5,800
1,315
Operating cash flow 36,454 33,392 39,365
38,853
613 2,838 3,000
3,000
35,841 30,555 36,365
35,853
Reported Profit Add: Depreciation Interest (Net of Tax) Less: Capex Free Cash Flow Current Ratio
9,783.5 10,932.7
Operating ratios
Year to March
FY16 FY17
FY18E
FY19E
Total Asset Turnover
Fixed Asset Turnover
1.8 11.2 1.4
10.5
1.4
12.4
1.4
14.1
1.9 1.4
1.4
1.4
Equity Turnover
Valuation parameters
Year to March
FY16 FY17
FY18E
FY19E
Adj. Diluted EPS (INR)
Y‐o‐Y growth (%)
135.8 16.1 132.3
(2.6)
154.8
17.0
171.1
10.5
Adjusted Cash EPS (INR)
146.4 142.9
166.5
183.6
20.1 20.6
17.6
15.9
P/B (x)
6.0 4.6
4.2
3.8
EV / Sales (x)
3.1 3.0
2.5
2.2
14.5 2.0 14.8
2.4
12.0
2.7
10.4
3.1
Diluted P/E (x)
EV / EBITDA (x)
Dividend Yield (%)
Peer comparison valuation Market cap
Name Diluted P/E (X)
EV / EBITDA (X)
P/B (X)
(USD mn)
FY18E
FY19E
FY18E
FY19E FY18E
FY19E
Bajaj Auto 12,238
17.6
15.9
12.0
10.4 4.2
3.8
Eicher Motors 11,780
32.1
22.6
22.6
15.3 10.4
7.5
Hero MotoCorp 11,550
20.1
17.2
13.1
11.1 6.7
5.9
Median ‐
20.1
17.2
13.1
11.1 6.7
5.9
AVERAGE ‐
23.3
18.6
15.9
12.3 7.1
5.7
Source: Edelweiss research
50 Edelweiss Securities Limited Bajaj Auto
Additional Data Directors Data Rahul Bajaj Rajiv Bajaj D S Mehta Shekhar Bajaj J N Godrej Mrs Suman Kirloskar Nanoo Chairman Managing Director
Director Director Director Director Pamnani Madhur Bajaj
Sanjiv Bajaj
Kantikumar R Podar
D J Balaji Rao
S H Khan
Naresh Chandra
Vice Chairman
Director
Director
Director
Director
Director
Auditors ‐ Dalal & Shah Holding – Top10
Bajaj holdings and i Life insurance corp Maharashtra scooters Bajaj sevashram limi Government pension f Perc. Holding 31.54
5.39
2.34
1.54
1.38
Perc. Holding 8.93
3.48
2.04
1.38
1.28
Jamnalal sons pvt lt
Jaya hind invest pvt
Bajaj niraj ramkrish
Norges bank
Bachhraj & co ltd
*in last one year
Bulk Deals
Data No Data Available Acquired / Seller B/S
Qty Traded
Price *in last one year Insider Trades
Reporting Data 21 Apr 2017 21 Feb 2017 07 Nov 2016 Acquired / Seller SANJIVNAYAN BAJAJ BAJAJ HOLDINGS & INVESTMENT LIMITED
RAJIVNAYAN BAJAJ B/S Sell Buy Buy Qty Traded 161000.00
161000.00
34900.00
*in last one year
51 Edelweiss Securities Limited Automobiles THIS PAGE IS INTENTIONALLY LEFT BLANK 52 Edelweiss Securities Limited COMPANY UPDATE EICHER MOTORS Opportunity size: Sky is the limit India Equity Research| Automobiles Eicher Motors (EIM) is well placed to ride the structural demand shift towards >250cc motorcycles with Royal Enfield’s (RE) first mover advantage. Further, exports have started gaining traction (up ~50% YoY in past 6 months), though on a low base. Margin improvement story has further legs as benefits of scale and vendor consolidation fully materialise. EIM’s truck business (VECV) has been gaining market share, albeit at a slower pace than initially expected. Given that auto is an early cycle play, we upgrade our target PE for RE to 30x (27x earlier). Maintain ‘BUY’ with target price of INR34,543 (INR29,749 earlier). EDELWEISS 4D RATINGS Absolute Rating BUY
Rating Relative to Sector Outperform
Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
MARKET DATA (R: EICH.BO, B: EIM IN) CMP : INR 27,928 Target Price : INR 34,543 RE: In a sweet spot 52‐week range (INR) : 29,983 / 19,397
Share in issue (mn) : 27.2 EIM is expected to sustain volume momentum given the shift in consumer preference M cap (INR bn/USD mn) : 760 / 11,775 towards >250cc motorcycles, extremely low penetration of >250cc bikes and Avg. Daily Vol.BSE/NSE(‘000) : 53.4 deepening of reach across smaller towns. Order books remain robust (~3 months waiting period) and same store sales (SSS) growth across top‐20 cities remains healthy SHARE HOLDING PATTERN (%)
(>15% YoY). Dedicated focus on developing export markets like Thailand, Indonesia, Current Q3FY17 Q2FY17
Colombia and Brazil will lend impetus to next leg of growth. Sustained volume Promoters * 50.6
50.6 50.6 momentum and operating leverage benefit should drive ~280bps margin improvement MF's, FI's & BK’s
4.0
3.8 3.5 over FY17‐19E. FII's
32.5
32.5 33.3 Others
VECV: Gaining market share albeit at a slower pace VECV’s market share gain (100bps in FY17) has been below expectation. New Pro series (addressing product gaps) and expanding network did not give the required impetus compared to some of its peers. We expect market share gain to be on a slower track going ahead given higher competition. Outlook and valuations: On a firm footing; maintain ‘BUY’ We factor in ~42% EPS CAGR over FY17‐19, driven by strong demand opportunity in RE and margin improvement, led by scale and vendor consolidation benefits, driving consolidated RoE to 38.7% (FY17: 37%). We maintain ‘BUY/SO’ with TP of INR34,543 (30x RE core EPS – preferred band of 25‐35x, 17x VECV core EPS and INR2,421 cash per share). At CMP, the stock trades at FY19E PER of 22.5x. Financials (Consolidated)
Year to December
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Adjusted Profit (INR mn)
No. of Shares outstanding (mn)
Adjusted Diluted EPS (INR)
EPS growth (%)
Diluted P/E (x)
EV/EBITDA (x)
ROAE (%)
FY16
156,887
79.5
24,472
12,779
27
470.5 107.2
59.0
33.8
40.0
FY17E
70,334
31.6
21,740
16,671
27 613.8
69.5
45.2
27.4
37.1
FY18E
93,806
33.4
30,621
23,597
27
868.8
41.5
31.9
20.4
37.3
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. (INR mn)
FY19E
127,598
36.0
43,449
33,633
27
1,238.3
42.5
22.4
14.1
38.7
12.9
13.0 12.7 :
* Promoters pledged shares (% of share in issue) NIL
PRICE PERFORMANCE (%)
Stock Nifty EW Auto Index
1 month (6.2) 1.0 (2.2)
3 months 9.2 6.4 7.4 12 months 43.6 17.4 21.6 Chirag Shah +91 22 6623 3367 [email protected] Karthik Subramaniam +91 22 6620 3156 [email protected] July 10, 2017 Edelweiss Securities Limited Automobiles Chart 2: Exports gaining traction 2,500 Royal Enfield dealerships
Chart 3: Operating leverage to drive RE margin improvement 100.0 CY2016
Dec
CY2017
Chart 4: VECV gaining share, albeit at a slow pace 15.0 80.0 13.0 60.0 Market share (%)
Yoy growth (%)
CY2015
Nov
CY10 CY11 CY12 CY13 CY14 FY16 FY17
Oct
0 Sep
0 Aug
500 Jan
150 Jul
1,000 Jun
300 1,500 May
450 2,000 Apr
600 Mar
Export volumes (units)
Dealerships (number)
750 Feb
Chart 1: RE ramping up network across Tier I/II cities 11.0 40.0 20.0 FY19E
FY18E
FY17
FY16
CY14
CY13
CY12
CY11
CY10
0.0 9.0 7.0 5.0 Revenue growth
FY11
EBITDA margins(RHS)
Staff costs & Other expenses as % revenues (RHS)
FY12
FY13
FY14
FY15
FY16
FY17
VECV M&HCV market share
Source: Table 1: Valuation snapshot INR mn
VECV (54.4% stake)
Standalone core EPS
Standalone cash per share
Value per share (INR)
FY19E
Target Multiple (x)
Target price
90 17.0 1,533
1,020 30.0 30,590
2,421
34,543 Source: Company, Edelweiss research 54 Edelweiss Securities Limited Eicher Motors
Company Description Incorporated in 1982, Eicher Motors (EIM) is the flagship company of the Eicher Group in India and a leading player in the Indian motorcycle and commercial vehicle (CV) segments. EIM manufactures and markets its motorcycle under the iconic brand name, ‘Royal Enfield’ and is market leader in the >250cc motorcycle segment with over 95% market share. EIM is a structural story on the premiumisation theme in motorcycles. The CV segment operates under a joint venture (JV) called VE Commercial Vehicles (VECV). We believe it is a strong candidate to break the duopoly of Tata Motors/Ashok Leyland in M&HCVs. Strong balance sheet, credible partner Volvo and management provide additional comfort. Investment Theme EIM (RE) remains key beneficiary of the shift in demand towards >250cc motorcycles given the ongoing premiumisation trend. Strong order book position, low penetration levels for premium motorcycles (3 per 1,000 males), network expansion across tier I/II cities and improving traction across export markets are likely to sustain the volume momentum. Operation leverage benefits are expected to drive robust ~280bps margin improvement over FY17‐19E. We believe VECV is a strong candidate to break the duopoly of Tata Motors/Ashok Leyland in M&HCVs. Key Risks Capacity constraints for 2W: Slower pace of capacity addition will restrict EIM’s ability to capitalise on the virtual monopolistic situation that it currently enjoys. Excessive reliance on single model: Around 70% of 2W sales are currently accounted by its single model, Classic. We believe, it is pertinent for EIM to create an alternate successful model given the fast‐changing consumer preferences. 55 Edelweiss Securities Limited Automobiles Financial Statements Key Assumptions Year to March FY16 FY17 GDP(Y‐o‐Y %) Inflation (Avg) 7.2 4.9 6.5 4.8 7.1
5.0
7.7
5.2
Repo rate (exit rate) 6.8 6.3 6.3
6.3
65.0 67.5 67.0
67.0
‐ 4.0 5.0
8.0
Depreciation
30.0 1.0 8.0
8.0
Macro USD/INR (Avg) Sector Motorcycle ‐ dom. vol. (% YoY) MHCV ‐ domestic vol (% YoY) Company Income statement
FY18E
FY19E
Year to March
FY17
FY18E
FY19E
70,334
37,045
93,806
48,826
127,598
65,824
Employee costs
10,575 4,024
4,684
5,991
Total SG&A expenses
20,627 7,526
9,675
12,334
132,414 48,594
63,186
84,150
24,472 21,740
30,621
43,449
4,517 1,538
2,162
2,587
EBIT
19,956 20,201
28,459
40,862
Add: Other income
1,119.8 2,273.3 3,103.13 4,379.99
Total operating expenses
EBITDA
58.9 38.6 26.2
32.2
Profit Before Tax
MHCV ‐ domestic vol (% YoY) 27.0 7.5 8.0
10.0
LCV ‐ dom. vol. (% YoY) 27.4 4.7 8.0
8.8
Royal Enfield (% YoY) VECV (INR) VECV (% YoY) Cost assumptions RM cost/vehicle Less: Interest Expense
107,681 107,681 109,835 112,032
6.0 ‐ 2.0
2.0
872,260 863,537 949,891 978,387
8.2 (1.0) 10.0
55,865
Employee cost/vehicle 15,930 5,199
5,085
EBITDA/vehicle 36,864 30,117 33,985
36,875
Financial assumptions 90 36
27
27
20,985 22,439
31,535
45,215
Less: Provision for Tax
6,466 7,203
9,776
14,017
Less: Minority Interest
1,741 ‐
‐
‐
Associate profit share
‐ 1,435
1,838
2,434
Reported Profit
12,779 16,671
23,597
33,633
Adjusted Profit
12,779 16,671
23,597
33,633
27 27
27
27
470.5 613.8
868.8
1,238.3
27 27
27
27
Adjusted Diluted EPS
470.5 613.8
868.8
1,238.3
Adjusted Cash EPS
584.1 618.3
887.6
1,263.6
Dividend per share (DPS)
100.2 100.0
130.6
186.2
Dividend Payout Ratio(%)
24.6 23.1
17.3
17.3
Shares o /s (mn)
Adjusted Basic EPS
Diluted shares o/s (mn)
152,464 51,321 54,192
5,574 3.0
(INR mn)
FY16 Royal Enfield (INR) 156,887 101,212 Income from operations
Materials costs
Revenue assumptions Motorcycle ‐ domestic volume (% YoY) Average price (INR) Depreciation rate (%) 10.8 3.2 3.9
4.3
Tax rate (%) 30.8 32.1 31.0
31.0
Common size metrics
Dividend payout (%) 24.6 23.1 17.3
17.3
Year to March
FY16 FY17
FY18E
FY19E
Net borrowings (INR mn) (358) 218 (144)
‐
Operating expenses
Materials costs
84.4 64.5 69.1
52.7
67.4
52.1
65.9
51.6
Capex (INR mn) 4,798 8,317 8,000
5,000
7 2 2
2
Inventory days 17 32 29
28
Payable days 52 77 73
73
(28) (43) (42)
(42)
B/S assumptions Debtor days Cash conversion cycle Staff costs
6.7 5.7
5.0
4.7
13.1 10.7
10.3
9.7
Depreciation
2.9 2.2
2.3
2.0
Interest Expense
0.1 0.1
‐
‐
EBITDA margins
15.6 30.9
32.6
34.1
9.3 23.7
25.2
26.4
S G & A expenses
Net Profit margins
Growth ratios (%)
Year to March
FY16 FY17
FY18E
FY19E
Revenues
EBITDA
52.6 86.6 (47.3)
4.5
33.4
40.9
36.0
41.9
PBT
79.7 25.8
40.5
43.4
Adjusted Profit
76.5 53.5
41.5
42.5
EPS
76.1 53.5
41.5
42.5
56 Edelweiss Securities Limited Eicher Motors
Balance sheet As on 31st March (INR mn)
Cash flow metrics
FY16 FY17 FY18E
FY19E
Share capital Reserves & Surplus 272 36,259 273 53,179 271
72,687
271
100,492
Operating cash flow
Investing cash flow
Shareholders' funds Financing cash flow
Year to March
36,531 53,451 72,958
100,763
Short term borrowings 226 444 300
300
Net cash Flow
Total Borrowings 226 444 300
300
Def. Tax Liability (net) 359 778 778
778
Sources of funds 37,116 54,673 74,036
101,841
Gross Block Net Block 41,705 8,508 47,705 9,774 55,705
15,612
60,705
18,025
333 2,650 2,650
2,650
8,841 12,424 18,262
34,241 50,361 3,084 3,359 Sundry Debtors 326 Loans & Advances FY16 FY17
FY18E
FY19E
22,817 18,117
(14,807) (22,350)
25,215
(20,473)
35,706
(27,620)
(5,855)
(5,629) (3,668)
(4,261)
2,381 (7,901)
480
2,231
Capex
(4,798) (8,317)
(8,000)
(5,000)
Dividend paid
(3,138) (3,851)
(4,089)
(5,828)
Profitability and efficiency ratios
Year to March
FY16 FY17
FY18E
FY19E
20,675
ROAE (%)
ROACE (%)
40.0 57.5 37.1
49.6
37.3
49.6
38.7
51.9
66,418
95,649
Inventory Days
17 32
29
28
4,309
5,863
Debtors Days
7 2
2
2
500 654
890
Payable Days
258 170 225
307
Cash Conversion Cycle
Other Current Assets 2,641 3,093 4,480
6,096
Current Assets (ex cash) 6,309 7,122 9,668
13,156
Gross Debt/EBITDA
Trade payable 7,232 8,327 11,117
15,127
Other Current Liab 5,043 6,907 9,195
Capital work in progress Total Fixed Assets Cash and Equivalents Inventories 52 77
73
73
(28) (43)
(42)
(42)
3.3 3.8
3.7
3.9
‐ ‐
‐
‐
Gross Debt/Equity
‐ ‐
‐
‐
12,512
Adjusted Debt/Equity
‐ ‐
1.8
2.2
Net Debt/Equity
(0.9) (0.9)
‐
‐
220.7 567.5
‐
‐
Total Current Liab 12,275 15,234 20,313
27,639
Net Curr Assets‐ex cash (5,967) (8,112) (10,644)
(14,484)
Uses of funds 37,116 54,673 74,036
101,841
BVPS (INR) Free cash flow 1,345.0 1,968.0 2,686.2
3,710.0
Year to March FY16 FY17 FY18E
FY19E
12,779 4,517 16,671 1,538 23,597
2,162
33,633
2,587
Reported Profit Add: Depreciation Interest (Net of Tax) (INR mn)
Current Ratio
Interest Coverage Ratio
Operating ratios
Year to March
FY16 FY17
FY18E
FY19E
Total Asset Turnover
Fixed Asset Turnover
4.1 9.9 1.5
7.7
1.5
6.1
1.5
6.6
Equity Turnover
4.3 1.6
1.5
1.5
Valuation parameters
63 24 19
19
Others 5,459 (116) (563)
(532)
Year to March
FY16 FY17
FY18E
FY19E
Less: Changes in WC 1,683 2,146 2,532
3,839
Operating cash flow 22,817 18,117 25,215
35,706
Adj. Diluted EPS (INR)
Y‐o‐Y growth (%)
470.5 76.1 613.8
53.5
868.8
41.5
1,238.3
42.5
4,798 8,317 8,000
5,000
Adjusted Cash EPS (INR)
18,019 9,800 17,215
30,706
Less: Capex Free Cash Flow 584.1 618.3
887.6
1,263.6
Diluted P/E (x)
59.4 45.5
32.1
22.6
P/B (x)
20.8 14.2
10.4
7.5
EV / Sales (x)
4.6 10.1
7.4
5.2
EV/Sales adjusted for Volvo 6.4 6.1
5.0
3.7
EV / EBITDA (x)
29.6 32.6
22.6
15.3
EV/EBITDA adjusted for Volvo Dividend Yield (%)
34.1 0.4 27.5
0.4
20.5
0.5
14.2
0.7
Peer comparison valuation Market cap
Name Diluted P/E (X)
EV / EBITDA (X)
P/B (X)
(USD mn)
FY18E
FY19E
FY18E
FY19E FY18E
FY19E
Eicher Motors 11,663
32.0
22.4
22.5
15.2 10.3
7.5
Bajaj Auto 12,455
17.6
15.9
12.0
10.4 4.2
3.8
Hero MotoCorp 11,636
19.3
17.5
12.6
11.3 6.6
5.9
Median ‐
19.3
17.5
12.6
11.3 6.6
5.9
AVERAGE ‐
23.0
18.6
15.7
12.3 7.1
5.7
Source: Edelweiss research
57 Edelweiss Securities Limited Automobiles Additional Data Directors Data S Sandilya, Chairman M J Sibbaiah Siddhartha Lal, MD Non‐Executive Independent Directors
Non‐Executive Independent Directors
Executive Director Priya Brat
Prateek Jalan
R L Ravichandran, Whole Time Director
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Executive Director Auditors ‐ Deloitte Haskins & Sells *as per last annual report
Holding – Top10
Perc. Holding 44.19
2.01
1.72
1.16
1.12
The simran siddhar t Citigroup glbl mkts Blackrock Lal tara vikram Joshi rukmani Capital group compan
Brinda lal trust
Vanguard group
Lal simran vikram
Lal siddhartha
Perc. Holding 5.41
1.78
1.61
1.16
1.08
*in last one year
Bulk Deals
Data No Data Available Acquired / Seller B/S
Qty Traded
Price *in last one year Insider Trades
Reporting Data 03 Apr 2017 03 Apr 2017 31 Mar 2017 31 Mar 2017 02 Feb 2017 Acquired / Seller KARVANSARAI TRAVEL & LIFESTYLE PVT. LTD.
EICHER GOODEARTH PVT. LTD.
KARVANSARAI TRAVEL & LIFESTYLE PVT. LTD.
EICHER GOODEARTH PVT. LTD.
THE SIMRAN SIDDHARTHA TARA BENEFIT TRUST
B/S Buy Sell Buy Sell Buy Qty Traded 15143.00
15143.00
15143.00
15143.00
2479907.00
*in last one year
58 Edelweiss Securities Limited COMPANY UPDATE HERO MOTOCORP Widening product basket critical India Equity Research| Automobiles Hero MotoCorp’s (HMCL) commuter bikes are well placed to benefit from expected rural recovery, given its high rural exposure (~50% volumes). However, weaker franchise in fast growing scooters and premium bikes, saw HMCL lose ~440bps market share in 2Ws over FY14‐17. Path‐breaking products from its recently inaugurated R&D centre, is a necessity to arrest market share decline. Margin improvement scope remains limited as gains from volume recovery and LEAP are likely to be offset by expiry of excise benefit and high competition in scooters. Given that auto sector is an early cycle play; we raise our core target PE to 19x (17x currently). Maintain ‘HOLD’ with TP of INR3,967 (INR3,585 earlier). Structural gaps dampen market share HMCL, with ~50% rural exposure and strong brand equity in commuter bikes, will benefit from rural demand recovery. However, a weaker franchise in the fast‐growing scooter and premium segments will impede market share gains. While the company has maintained stronghold in the executive segment, the segment share (% 2W industry) has reduced to ~54% in FY17 from ~65% in FY14. As a result, HMCL’s aggregate 2W market share dropped by ~440bps to 37% in FY17. Limited drivers for margin expansion In our view, margin benefits from the ongoing LEAP programme and impending volume recovery are likely to get neutralised by HMCL’s efforts to gain market share in the highly competitive scooter and premium segments. Also, in FY19E the excise benefits at its Haridwar plant will cease, thereby impacting margins by ~80bps. Factoring in same, we estimate 50bps margin expansion over FY17‐19. Outlook and valuations: Balanced risk‐reward; maintain ‘HOLD’ In our view, HMCL will have to counter: (1) demand shift from its key executive motorcycle segment to scooters; and (2) rising demand for >250cc motorcycles, where HMCL has low presence. However, healthy RoE of 36% and robust FCF generation (10% sales in FY19E) will limit downside. We maintain ‘HOLD/SU’ with TP of INR3,967 (19x FY19E core EPS, INR379 cash per share). At CMP, the stock trades at 17x FY19 PER. Financials (INR mn)
EDELWEISS 4D RATINGS Absolute Rating HOLD
Rating Relative to Sector Underperform
Risk Rating Relative to Sector High
Sector Relative to Market Underweight
MARKET DATA (R: HROM.BO, B: HMCL IN) CMP : INR 3,732 Target Price : INR 3,967 52‐week range (INR) : 3,880 / 2,844 Share in issue (mn) : 199.7 M cap (INR bn/USD mn) : 745 / 11,550 Avg. Daily Vol.BSE/NSE(‘000) : 415.0 SHARE HOLDING PATTERN (%)
Current
Q3FY17 Q2FY17
Promoters * 34.6
34.6 34.6 MF's, FI's & BK’s
12.5
13.4 13.8 FII's
42.7
42.9 42.6 Others
10.2
9.1 9.0 :
* Promoters pledged shares (% of share in issue) NIL
PRICE PERFORMANCE (%)
Stock Nifty EW Auto Index 1 month (1.3) 1.0 3 months 16.7 6.4 (2.2)
7.4 12 months 17.8 17.4 21.6 Year to March Revenues Rev. growth (%) Adjusted Profit Basic shares outstanding (mn) Adjusted diluted EPS (INR) EPS Growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY16 285,993 3.7 31,324 200 156.9 42.1 23.8 15.8 43.2 FY17
284,750
(0.4)
33,771
200 169.1
7.8
22.1
14.8
37.4
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. FY18E
318,177
11.7
37,177
200
186.2
10.1
20.1
13.1
34.9
FY19E
354,560
11.4
43,217
200
216.4
16.2
17.2
11.1
36.2
Chirag Shah +91 22 6623 3367 [email protected] Karthik Subramaniam +91 22 6620 3156 [email protected] July 10, 2017 Edelweiss Securities Limited Automobiles 60 15
19
27
24
Chart 2: …HMCL’s weak franchise in scooters … 20.0 3
13
4
14
12
11
26
27
18.0 Market share (%)
40 0 HMCL
45
43
41
40
39
37
FY12
FY13
FY14
FY15
FY16
FY17
HMSI
Bajaj
TVS
Royal Enfield
12.0 10.0 FY13
FY14
FY15
FY16
FY17
HMCL scooter market share
Chart 4: ..and demand shifting to scooters & premium bikes 20.0 100.0 16.0 80.0 12.0 60.0 19
21
24
13
12
12
28
31
32
13
14
14
(%)
Market share (%)
FY12
Others
Chart 3: …Dwindling market share in premium motorcycles … 40.0 8.0 62
4.0 20.0 0.0 0.0 FY12
FY13
FY14
FY15
FY16
FY12
FY17
1.6 2.8
1.2 2.2
0.8 1.6
0.4 1.0
0.0 FY14
FY15
LEAP benefit (INRbn)
FY16
FY17
Margin benefit (RHS)
Margin benefit(bps)
3.4
59
55
51
49
FY13
FY14
FY15
FY16
FY17
Premium
Scooters
Mopeds
Chart 6: Scope for margin expansion remains limited 10,000 20.0 2.0 Volumes (''00 units)
Chart 5: LEAP benefits largely factored in 4.0
61
Commuter
HMCL premium motorcycle market share
Cost savings (INRbn)
14.0 8,500 18.0 7,000 16.0 5,500 14.0 4,000 12.0 2,500 10.0 Margins (%)
20 16.0 FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
2W market share (%)
Chart 1: 2W market share loss driven by… 100 1
1
2
1
14
13
12
13
80 14
11
18
19
Volumes
EBITDA margins (RHS)
Source: SIAM, Company, Edelweiss research 60 Edelweiss Securities Limited Hero MotoCorp
Table 1: Valuation FY19E
189
19
379
3,967 Core EPS (INR)
Earnings multiple (x)
Cash per share (INR)
Target price (INR)
Source: Edelweiss research
61 Edelweiss Securities Limited Automobiles Company Description Hero MotoCorp (HMCL) is the world’s largest 2‐wheeler (2W) company (in volume terms). HMCL has production capacity of 9.2mn 2Ws at its 5 manufacturing facilities at Gurgaon and Dharuhera in Haryana, Haridwar in Uttaranchal, Neemrana in Rajasthan and the latest one at Vadodara in Gujarat. The company offers motorcycles in all the 3 major segments— HF Deluxe in entry; Splendor, Passion and Glamour in executive; and Achiever and Karizma in premium. It also sells Maestro Edge, Duet and Pleasure in the un‐geared scooters segment. Investment Theme With ~50% rural exposure, strong market share and brand equity in the commuter segment, HMCL is a key beneficiary of rural demand recovery. However, a weak franchise in scooters and premium motorcycles, both segments where there are robust structural demand tailwinds, will impede market share gains for HMCL. On margins front, we believe benefits from volume recovery and LEAP programme will be offset by expiry of excise benefits and efforts to gain market share across highly competitive scooter and premium motorcycle segments. Key Risks Market share: Inability to create strong brand in scooters and premium motorcycles remains the biggest risk to HMCL. Its market share has been declining every year by 100bps due to shifting preference by customers towards scooters and premium motorcycles 62 Edelweiss Securities Limited Hero MotoCorp
Financial Statements Key Assumptions Year to March FY16 FY17 GDP(Y‐o‐Y %) Inflation (Avg) 7.2 4.9 6.5 4.8 7.1
5.0
7.7
5.2
Repo rate (exit rate) 6.8 6.3 6.3
6.3
65.0 67.5 67.0
67.0
(0.4) 4.0 Motorcycle ‐ Domestic (1.3) 1.6 8.7
10.2
Depreciation
Motorcycle ‐ Exports 10.5 (18.0) 15.0
30.0
EBIT
9 (4) 12
12
Add: Other income
41,754 42,019 42,841
43,664
2.5 0.6 2.0
1.9
Macro USD/INR (Avg) Sector Motorcycle ‐ dom. vol. (% YoY) Company Scooter ‐ total vol Avg realisation (INR) Avg realisation (% YoY) Cost assumptions RM cost/vehicle Employee cost/vehicle Average salary Promotion cost (% revenue) EBITDA/vehicle Financial assumptions Depreciation rate (%) FY18E
FY19E
Income statement
Year to March
FY16 FY17
Total volume (nos)
% Growth in volume
8.0
FY19E
6,632,144 6,664,046 7,283,504 8,094,762
0.1 0.5
9.3
11.1
Income from operations
285,993 284,750
318,177
354,560
Materials costs
193,149 190,118
213,197
236,781
Manufacturing expenses
Employee costs
5.0
(INR mn)
FY18E
Total operating expenses
EBITDA
2,252 2,498
2,704
2,988
13,196 13,960
16,000
17,717
241,523 238,402
266,679
294,939
44,470 46,348
51,498
59,621
4,414 4,927
5,567
5,999
40,056 41,421
45,931
53,622
3,911.2 5,224.3 6,125.00 6,881.53
Less: Interest Expense
22 61
60
60
Profit Before Tax
43,946 46,585
51,996
60,444
Less: Provision for Tax
12,622 12,813
14,819
17,227
29,123 28,529 29,271
29,251
Reported Profit
31,324 33,771
37,177
43,217
1,990 2,095 2,197
2,189
Adjusted Profit
31,324 33,771
37,177
43,217
200 200
200
200
156.9 169.1
186.2
216.4
1,738,093 1,877,140 2,027,311 2,189,496
2.5 2.7 2.7
2.8
6,705 6,955 7,070
7,365
Shares o /s (mn)
Adjusted Basic EPS
Diluted shares o/s (mn)
200 200
200
200
Adjusted Diluted EPS
156.9 169.1
186.2
216.4
Adjusted Cash EPS
4.7 4.6 4.8
4.8
179.0 193.8
214.0
246.4
Tax rate (%) 28.7 27.5 28.5
28.5
Dividend per share (DPS)
72.0 85.0
110.0
120.0
Dividend payout (%) 55.0 60.2 70.8
66.4
Dividend Payout Ratio(%)
55.0 60.2
70.8
66.4
B/S assumptions 11,758 11,507 10,000
9,000
Common size metrics
Debtor days 17 18 19
19
Year to March
FY16 FY17
FY18E
FY19E
Inventory days 14 13 12
12
Payable days 53 58 59
59
Operating expenses
Materials costs
84.5 67.5 83.7
66.8
83.8
67.0
83.2
66.8
(22) (27) (28)
(28)
Capex (INR mn) Cash conversion cycle Staff costs
4.6 4.9
5.0
5.0
11.5 11.2
10.9
10.6
1.5 1.7
1.7
1.7
‐ ‐
‐
‐
EBITDA margins
15.5 16.3
16.2
16.8
Net Profit margins
11.0 11.9
11.7
12.2
S G & A expenses
Depreciation
Interest Expense
Growth ratios (%)
Year to March
FY16 FY17
FY18E
FY19E
Revenues
EBITDA
3.7 25.5 (0.4)
4.2
11.7
11.1
11.4
15.8
PBT
39.6 6.0
11.6
16.2
Adjusted Profit
42.1 7.8
10.1
16.2
EPS
42.1 7.8
10.1
16.2
63 Edelweiss Securities Limited Automobiles Balance sheet As on 31st March FY16 FY17 (INR mn)
Cash flow metrics
Year to March
FY16 FY17
FY18E
FY19E
39,138 40,280
(22,713) (19,439)
39,513
(14,640)
44,050
(15,118)
(26,375)
(28,767)
FY18E
FY19E
Share capital Reserves & Surplus 399 399 399
79,048 100,713 111,576
399
126,086
Operating cash flow
Investing cash flow
Shareholders' funds 79,448 101,113 111,975
126,486
Financing cash flow
(16,840) (20,956)
Def. Tax Liability (net) 2,627 4,143 4,143
4,143
Net cash Flow
Sources of funds 82,074 105,256 116,119
130,629
Capex
Gross Block Net Block 93,969 105,969 115,969
38,367 45,899 50,332
124,969
53,334
Dividend paid
Capital work in progress (28,707)
FY17
FY18E
FY19E
43.2 60.7 37.4
51.7
34.9
48.9
36.2
50.7
Inventory Days
14 13
12
12
Debtors Days
17 18
19
19
16,653
Payable Days
53 58
59
59
41,896
45,246
Cash Conversion Cycle
(22) (27)
(28)
(28)
32,473 36,531
40,403
Current Ratio
9,214 10,602
11,736
Net Debt/Equity
Interest Coverage Ratio
53,040
59,053 68,316
6,730 6,563 7,420
8,405
Sundry Debtors 12,828 15,619 17,325
19,624
Loans & Advances 13,919 449 498
564
1,532 16,653 16,653
Current Assets (ex cash) 35,008 39,284 Trade payable 27,669 Other Current Liab 13,664 Total Current Liab 41,333 41,686 47,133
52,138
Net Curr Assets‐ex cash (6,324) (2,403) (5,237)
(6,892)
Uses of funds 82,074 105,256 116,119
130,629
506.3 560.7
633.4
(INR mn)
FY16 FY17 FY18E
FY19E
31,324 4,414 33,771 4,927 37,177
5,567
43,217
5,999
15 44 43
43
Others 5,314 (2,384) (439)
(3,554)
Less: Changes in WC 1,930 (3,922) 2,835
1,655
Operating cash flow 39,138 40,280 39,513
44,050
Less: Capex 11,758 11,507 10,000
9,000
Free Cash Flow 27,380 28,773 29,513
35,050
(26,315)
FY16 48,606 43,977 Interest (Net of Tax) (17,223) (20,334)
ROAE (%)
ROACE (%)
44,421 Cash and Equivalents Year to March (9,000)
Year to March
Total Fixed Assets Reported Profit Add: Depreciation (10,000)
81,481
2,707
397.8 164
(11,758) (11,507)
56,041
2,707
BVPS (INR) Free cash flow (1,502)
2,707 Other Current Assets (116)
Profitability and efficiency ratios
6,054 Inventories (415) 1.9 2.4
2.3
2.4
(0.6) (0.6)
(0.6)
(0.6)
1,863.1 684.6
765.5
893.7
Operating ratios
Year to March
FY16 FY17
FY18E
FY19E
Total Asset Turnover
Fixed Asset Turnover
3.9 8.5 3.0
6.8
2.9
6.6
2.9
6.8
Equity Turnover
3.9 3.2
3.0
3.0
Valuation parameters
Year to March
FY16 FY17
FY18E
FY19E
Adj. Diluted EPS (INR)
Y‐o‐Y growth (%)
156.9 42.1 169.1
7.8
186.2
10.1
216.4
16.2
Adjusted Cash EPS (INR)
179.0 193.8
214.0
246.4
24.1 22.3
20.3
17.4
P/B (x)
9.5 7.5
6.7
6.0
EV / Sales (x)
2.5 2.4
2.2
1.9
16.0 1.9 15.0
2.3
13.3
2.9
11.3
3.2
Diluted P/E (x)
EV / EBITDA (x)
Dividend Yield (%)
Peer comparison valuation Market cap
Name Diluted P/E (X)
EV / EBITDA (X)
P/B (X)
(USD mn)
FY18E
FY19E
FY18E
FY19E FY18E
FY19E
Hero MotoCorp 11,636
20.3
17.4
13.3
11.3 6.7
6.0
Bajaj Auto 12,455
17.6
15.9
12.0
10.4 4.2
3.8
Median ‐
18.9
16.7
12.7
10.8 5.5
4.9
AVERAGE ‐
18.9
16.7
12.7
10.8 5.5
4.9
Source: Edelweiss research
64 Edelweiss Securities Limited Hero MotoCorp
Additional Data Directors Data Pradeep Dinodia V P Malik Dr. Anand C Burman Analjit Singh Paul Edgerley Toshiyuki Inuma Pawan Munjal Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Other Non‐Executive Directors Other Non‐Executive Directors Executive Directors Dr. Pritam Singh
M Damodaran
Ravi Nath
Suman Kant Munjal
Takashi Nagai
Brijmohan Lall Munjal
Sunil Kant Munjal
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Other Non‐Executive Directors
Other Non‐Executive Directors
Executive Directors Executive Directors Auditors ‐ A F Ferguson & Co *as per last annual report
Holding – Top10
Perc. Holding 20
13.98
5.25
4.35
2.5
Bahadur chand invest Munjal pawan Max new york life in Aberdeen Franklin resources Brijimohan om prak
Munjal brijmohan lal
Life insurance corp
Massachusetts mutual
Lazard ltd
Perc. Holding 13.98
6.21
5.14
3.67
2.42
*in last one year
Bulk Deals
Data 27 Mar 2017 27 Mar 2017 24 Mar 2017 24 Mar 2017 11 Aug 2016 11 Aug 2016 11 Aug 2016 Acquired / Seller Brij Mohan Lal Om Parkash Bahadur Chand Investments Pvt Ltd
Bahadur Chand Investments Pvt Ltd
Brij Mohan Lal Om Parkash Bahadur Chand Investments Pvt Ltd
Hero Investcorp Pvt Ltd Brij Mohan Lal Om Parkash B/S Sell
Buy
Buy
Sell
Buy
Buy
Sell
Qty Traded 8878000 8878000 8878000 8878000 9761976 873756 11509488 Price 3375.00
3375.00
3375.00
3375.00
3319.00
3319.00
3319.00
*in last one year
Insider Trades
Reporting Data 28 Mar 2017 28 Mar 2017 17 Oct 2016 Acquired / Seller M/s Brijmohan Lal Om Prakash, Partnership Firm
Bahadur Chand Investments Private Limited
Brijmohan Lall & Sons, HUF B/S Sell Buy Sell Qty Traded 17756000.00
17756000.00
32500.00
*in last one year
65 Edelweiss Securities Limited Automobiles THIS PAGE IS INTENTIONALLY LEFT BLANK 66 Edelweiss Securities Limited COMPANY UPDATE MAHINDRA & MAHINDRA Course correction in UVs; tractors on terra firma
India Equity Research| Automobiles
Mahindra & Mahindra’s (M&M) tractor business is in a sweet spot to benefit from healthy demand and sustain market share gain momentum riding new launches and expanding reach. Moreover, we expect UVs to get back on track as it sharpens focus on: a) new launches to address product gaps (new MPV, Tivoli‐based SUV); and b) corrective measures to address lacuna in existing portfolio. We revise up our target core P/E to 15x (from 14x) to factor in the early cycle nature of auto and tractor businesses. Maintain ‘BUY’ with SOTP‐based TP of INR 1,540 (INR1,518 earlier) BUY
Rating Relative to Sector Outperform
Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight
MARKET DATA (R: MAHM.BO, B: MM IN) : INR 1,367 Target Price : INR 1,540 UV: In course correction mode 52‐week range (INR) : 1,508 / 1,141 Share in issue (mn) : 621.1 We expect M&M’s market share loss (down ~1250bps in past 3 years to ~29% in FY17) in UVs to stem given: (1) sharpening focus on cashing in on demand spurt for compact SUVs/crossovers via new MPV ’321’ (FY18) and Tivoli‐based SUV ’S201’ (FY19); (2) corrective measures to address lacuna in recent launches TUV3OO/KUV1OO; and (3) launch of refreshes/petrol variants across the portfolio. Pick up in Bolero volumes with rural recovery is another lever for market share gains, in our view. M cap (INR bn/USD mn) : 850 / 13,162 Tractors: Market share gains to sustain amidst buoyant demand We estimate industry tractor demand to post healthy double digit growth in FY18 led by normal monsoon and government’s thrust on reviving the rural economy. M&M clocked all‐time high market share in FY17 of 42.6% and we expect the momentum to sustain riding strong response to new launches (YUVO, NOVO, JIVO) and ongoing network expansion drive. Outlook and valuations: Perking up; maintain ‘BUY’ We estimate core EPS CAGR of 19% over FY17‐19 driven by tractors and LCV. However, we are factoring only 9% growth in UVs as we prefer to await fate of new launches, given the past disappointments. Given that the auto sector is an early cycle play, we revise up our target core P/E to 15x (from 14x). We maintain ‘BUY/SO’ with SOTP‐
based TP of INR1,540 (15x FY19E core EPS, INR100 cash per share and INR417 for listed subsidiaries). At CMP, the stock trades at FY19E PER of 18x. Financials Year to March FY16 FY17
Revenues 388,566 418,954
Rev. growth (%) 3.7 7.8
Adjusted Profit 32,935 37,429
Basic shares outstanding (mn) Adjusted diluted EPS (INR) EPS Growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) Absolute Rating CMP EDELWEISS 4D RATINGS 621 53.0 4.2 25.8 15.9 15.6 621
60.3
13.6
22.7
15.0
15.3
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Avg. Daily Vol.BSE/NSE(‘000) : 1,148.3 SHARE HOLDING PATTERN (%)
Current
Q3FY17 Q2FY17
Promoters * 25.3
25.3 25.4 MF's, FI's & BK’s
20.1
19.1 17.8 FII's
34.5
35.6 36.7 Others
20.1
20.0 20.1 :
* Promoters pledged shares (% of share in issue) 2.8
PRICE PERFORMANCE (%)
Stock Nifty EW Auto
Index 1 month (4.1) 1.0 3 months 6.8 6.4 (2.2)
7.4 12 months (5.9) 17.4 21.6 (INR mn)
FY18E
475,467
13.5
43,117
621
69.4
15.2
19.7
12.4
15.4
FY19E
528,919
11.2
48,289
621
77.7
12.0
17.6
10.9
15.3
Chirag Shah +91 22 6623 3367 [email protected] Karthik Subramaniam +91 22 6620 3156 [email protected] July 10, 2017 Edelweiss Securities Limited Automobiles Chart 2: UV share at trough; new launch success key 50 40 4,800 Market share (%)
Volumes (units)
6,000 3,600 2,400 1,200 TUV3OO
32 4 26 (8)
(20)
41 10 40 0 39 (9)
FY15
FY16
FY16
FY17
Chart 4: Tractor product mix improving as well 100 42
51
49
49
51
40
31
33
34
33
FY13
FY14
FY15
FY16
FY17
60 40 20 0 FY17
M&M tractor market share
M&M tractor volume growth(RHS)
FY15
80 (18)
38 FY14
M&M UV market share
M&M UV volume growth (RHS)
Volume mix (%)
19 Volume growth (%)
Market share (%)
16 KUV1OO
42 FY14
38 FY13
Chart 3: Tractor share driven by new launches + better reach 28 43 FY13
28 20 May‐17
Mar‐17
Jan‐17
Nov‐16
Sep‐16
Jul‐16
May‐16
Mar‐16
Jan‐16
Nov‐15
Sep‐15
0 44 Volume growth (%)
Chart 1: TUV3OO/KUV1OO performance has been subdued Upto 30 hp
31‐40 hp
41‐50 hp
51 hp and above
Source: SIAM, CRISIL, Edelweiss research 68 Edelweiss Securities Limited Mahindra & Mahindra Ltd
LCV market share (%)
Chart 5: M&M has gained market share in LCVs led by slew of new launches 100 80 60 56
58
57
31
30
29
FY11
FY12
FY13
48
43
39
38
36
39
41
41
FY14
FY15
FY16
FY17
40 20 0 M&M
TTMT
AL
Force Motors
Others
Source: SIAM, Edelweiss research Table 1: SOTP valuation Basis of valuation
Investment in listed companies
Tech Mahindra
MMFSL
Mahindra Lifespace Developers
Mahindra Holidays and Resorts
Mahindra CIE*
CIE Automotive Spain#
Swaraj Engines
Ssangyong
Sub‐total
Investments valued at 25% discount
Core EPS (FY19E)
Target multiple (PE)
Core business
Cash per share
Target price (INR)
Total nos of shares
Diluted nos of shares (mn nos)
Less: Adj. for trea. shares (mn nos)
Net nos of shares outstanding (mn nos)
CMP CMP CMP CMP CMP CMP CMP 3x CY16E EV‐EBITDA
Value/Mcap
(INR mn)
96,785
102,622
9,305
40,750
15,665
23,142
9,652
54,711
M&M holding
(%)
26.7
51.2
51.1
75.0
20.2
12.4
33.2
73.2
CMP
(INR)
378
352
446
612
240
1,447
2,339
Value/share
on CMP (INR)
172
182
16
72
28
41
17
40
568
426
68
15.0
1,014
100
1,540
621
51.8
569.3 Source: Edelweiss research 69 Edelweiss Securities Limited Automobiles Company Description Mahindra & Mahindra (M&M) operates through 9 segments—automotive, which involves sales of UVs/CVs and 3Ws, spare parts and related services; farm equipment, which involves tractors, spare parts and related services; financial services, which consists of services related to financing, leasing and hire purchase of automobiles and tractors; steel trading & processing, which consists of trading and processing of steel; infrastructure, which consists of operating of commercial complexes, project management and development; hospitality, which involves sale of timeshare; IT services, which involves services rendered for information technology (IT) and telecom; Systech, which consists of automotive components and other related products and services, and Others, which consists of logistics, after‐market, 2Ws and investment. It also acquired majority (70%) stake in Korea‐based Ssangyong Motors Company in FY11 to become a global SUV company. Investment Theme Key reasons for M&M losing market share in UVs in recent years are: (a) failure to cash in on the strong demand for compact SUVs & crossovers; and (b) subdued volume performance of recent launches (TUV3OO and KUV1OO). However, we expect this business to get back on track given the company's strong focus on addressing product gaps (new MPV and Tivoli‐
based SUV) and refreshes & petrol variants launch across its portfolio. Moreover, the tractor business is in a sweet spot and well placed to benefit from robust industry demand and sustain market share gains, riding new launches and network expansion. Key Risks UV market share: M&M needs to realign itself with the changing customer profile. With limited success of its recent launches – KUV3OO and TUV1OO, it become critical for M&M to get is next 2 launches right and start gaining market share. Losses in unlisted subsidiaries: M&M has ventured into businesses like 2Ws, etc., and is incurring losses at operational level. In the event of failure to turn around the business, the company might have to infuse more capital in drag performance of its core business. Managing a complex group structure: M&M is a conglomerate with interests in automotive, farm equipment, real estate, tech services, and hospitality, among others. Managing this complex structure could divert focus from the core business and could pose execution risks. 70 Edelweiss Securities Limited Mahindra & Mahindra Ltd
Financial Statements Key Assumptions Year to March FY16 FY17 GDP(Y‐o‐Y %) Inflation (Avg) 7.2 4.9 6.5 4.8 7.1
5.0
7.7
5.2
Repo rate (exit rate) 6.8 6.3 6.3
6.3
65.0 67.5 67.0
67.0
Macro USD/INR (Avg) Sector FY18E
FY19E
Tractor ‐ dom. vol (% YoY) (11) 20 12
10
UV ‐ domestic vol. (% YoY) 5.0 35.0 20.0
(2.0) 8.0 LCV ‐ dom. vol. (% YoY) Company Income statement
Year to March
FY16 FY17
FY18E
FY19E
388,566 418,954
265,115 285,265
475,467
322,108
528,919
359,607
56,733
Income from operations
Materials costs
Manufacturing expenses
45,817 48,404
53,821
Employee costs
25,647 28,729
32,275
37,022
336,579 362,398
408,205
453,362
Total operating expenses
EBITDA
51,988 56,556
67,262
75,557
Depreciation
12,484 14,721
16,767
17,426
15.0
EBIT
39,504 41,836
50,496
58,131
10.0
10.0
Add: Other income
7,909.5 12,034.6 12,427.97 12,128.49
Tractor ‐ dom. vol (% YoY) (11) 27 14
10
Add: Exceptional items
UV ‐ domestic vol. (% YoY) 7.5 0.1 8.8
8.6
LCV ‐ dom. vol. (% YoY) 5.6 7.7 11.6
12.0
3‐wheeler (Goods) ‐ dom. Vol. (% (3) (5) 2
3
561,660 544,365 558,590
567,140
Avg realisation (INR) Avg realisation (% YoY) Cost assumptions RM cost/vehicle Employee cost/vehicle Average salary EBITDA/vehicle 3.5 (3.1) Less: Interest Expense
2.6
1.5
383,215 370,657 378,420
385,594
37,072 37,329 (INR mn)
37,918
39,697
1,095,020 1,098,729 1,126,366 1,157,795
1,764
2,012
‐
‐
Profit Before Tax
45,144 53,597
61,159
68,495
Less: Provision for Tax
12,166 14,708
18,042
20,206
Reported Profit
32,978 38,889
43,117
48,289
44 1,460
‐
‐
32,935 37,429
43,117
48,289
Exceptional Items
Adjusted Profit
1,764
Shares o /s (mn)
621 621
621
621
Adjusted Basic EPS
53.0 60.3
69.4
77.7
Diluted shares o/s (mn)
621 621
621
621
Adjusted Diluted EPS
53.0 60.3
69.4
77.7
Adjusted Cash EPS
73.1 84.0
96.4
105.8
Dividend per share (DPS)
12.6 13.0
14.8
16.3
Dividend Payout Ratio(%)
25.5 22.4
23.0
22.6
73,486 Avg. Interest rate (%) 8.4 5.0 5.0
5.0
Depreciation rate (%) 7.8 8.2 8.3
8.3
Tax rate (%) 26.9 27.4 29.5
29.5
Common size metrics
Dividend payout (%) 25.5 22.4 23.0
22.6
Year to March
FY16 FY17
FY18E
FY19E
Net borrowings (INR mn) (4,966) 13,231 (2,000)
‐
Operating expenses
Materials costs
86.6 68.2 86.5
68.1
85.9
67.7
85.7
68.0
Capex (INR mn) B/S assumptions 81,017
2,285
60 75,146 Financial assumptions 79,021
2,329 22,211 22,500 24,500
25,000
Debtor days 22 23 21
19
S G & A expenses
Inventory days 36 36 34
36
Payable days 91 97 90
85
(32) (39) (35)
(30)
Cash conversion cycle Staff costs
6.6 6.9
6.8
7.0
11.8 11.6
11.3
10.7
Depreciation
3.2 3.5
3.5
3.3
Interest Expense
0.6 0.5
0.4
0.3
EBITDA margins
13.4 13.5
14.1
14.3
8.5 8.9
9.1
9.1
Net Profit margins
Growth ratios (%)
Year to March
FY16 FY17
FY18E
FY19E
Revenues
EBITDA
3.7 12.9 7.8
8.8
13.5
18.9
11.2
12.3
PBT
3.6 18.7
14.1
12.0
Adjusted Profit
4.2 13.6
15.2
12.0
EPS
4.2 13.6
15.2
12.0
71 Edelweiss Securities Limited Automobiles Balance sheet As on 31st March FY16 FY17 (INR mn)
Cash flow metrics
Year to March
FY16 FY17
FY18E
FY19E
FY18E
FY19E
Share capital Reserves & Surplus 2,963 2,968 2,968
220,880 261,132 293,804
2,968
330,568
Operating cash flow
Investing cash flow
56,853 20,270
(26,033) (48,500)
50,097
(40,500)
55,376
(41,000)
Shareholders' funds 223,843 264,101 296,772
333,536
Financing cash flow
(24,047) (11,525)
14,583
(12,446)
6,773 (13,647)
(2,849)
2,851
(22,211) (22,500)
(24,500)
(25,000)
10,446
11,525
FY17
FY18E
FY19E
15.3
19.5
15.4
19.8
15.3
20.0
Short term borrowings 5,462 11,311 11,311
11,311
Net cash Flow
Long term borrowings 19,954 27,337 25,337
25,337
Capex
Total Borrowings 25,416 38,648 36,648
36,648
Dividend paid
Def. Tax Liability (net) 14,216 8,581 8,581
8,581
Sources of funds 263,475 311,329 342,001
378,764
Profitability and efficiency ratios
Gross Block Net Block 169,411 191,911 216,411
99,430 107,120 114,853
209,955
100,389
Year to March
FY16 ROAE (%)
ROACE (%)
15.6 19.8 Capital work in progress 15,776 6,329 8,880 9,179
6,329
28,368
Total Fixed Assets 115,206 113,449 121,183
128,756
Inventory Days
36 36
34
36
Non current investments 117,066 139,222 145,222
151,222
Debtors Days
22 23
21
19
91 97
90
85
(32) (39)
(35)
(30)
Cash and Equivalents 48,065 42,181 49,332
62,183
Payable Days
Inventories 33,260 31,861 39,080
43,473
Cash Conversion Cycle
Sundry Debtors 23,497 28,554 26,053
28,982
Current Ratio
1.2 1.5
1.5
1.7
Loans & Advances 44,554 5,599 42,040
49,595
Gross Debt/EBITDA
0.5 0.7
0.5
0.5
61,865
62,371
Gross Debt/Equity
0.1 0.1
0.1
0.1
109,496 127,383 169,038
184,421
Other Current Assets 8,184 Current Assets (ex cash) Trade payable Other Current Liab 61,369 73,611 78,199 80,764
52,747 32,707 0.1 0.1
0.1
0.1
86,946
Net Debt/Equity
(0.1) ‐
‐
(0.1)
Interest Coverage Ratio
17.0 18.3
28.6
32.9
62,009
60,872
Total Current Liab 126,358 110,906 142,773
147,818
Net Curr Assets‐ex cash (16,863) 26,264
36,603
Uses of funds 263,475 311,329 342,001
378,764
16,477 Operating ratios
Year to March
FY16 FY17
FY18E
FY19E
Total Asset Turnover
Fixed Asset Turnover
1.5 4.4 1.5
4.1
1.5
4.3
1.5
4.9
Equity Turnover
1.8 1.7
1.7
1.7
BVPS (INR) Free cash flow 360.4 425.2 477.8
Year to March FY16 FY17 FY18E
FY19E
32,978 12,484 38,889 14,721 43,117
16,767
48,289
17,426
Valuation parameters
Year to March
FY16 FY17
FY18E
FY19E
1,701 1,658 1,244
1,244
(4,186) (1,658) (1,244)
(1,244)
Adj. Diluted EPS (INR)
Y‐o‐Y growth (%)
53.0 4.2 60.3
13.6
69.4
15.2
77.7
12.0
(13,876) 33,340 9,787
10,339
Adjusted Cash EPS (INR)
73.1 84.0
96.4
105.8
55,376
Diluted P/E (x)
25.8 22.7
19.7
17.6
2.5
Reported Profit Add: Depreciation Interest (Net of Tax) Others Less: Changes in WC Operating cash flow 56,853 20,270 50,097
537.0
Adjusted Debt/Equity
(INR mn)
Less: Capex 22,211 22,500 24,500
25,000
P/B (x)
3.8 3.2
2.9
Free Cash Flow 34,642 (2,230) 25,597
30,376
EV / Sales (x)
2.1 2.0
1.8
1.6
15.9 0.9 15.0
1.0
12.4
1.1
10.9
1.2
EV / EBITDA (x)
Dividend Yield (%)
Peer comparison valuation Market cap
Name Diluted P/E (X)
EV / EBITDA (X)
P/B (X)
(USD mn)
FY18E
FY19E
FY18E
FY19E FY18E
FY19E
Mahindra & Mahindra Ltd 13,001
19.5
17.6
12.3
10.9 2.8
2.5
Maruti Suzuki India Ltd 34,419
25.1
21.1
15.3
12.5 5.3
4.5
Tata Motors Ltd 21,106
10.7
8.7
4.6
3.8 2.0
1.6
Median ‐
19.5
17.6
12.3
10.9 2.8
2.5
AVERAGE ‐
18.4
15.8
10.7
9.1 3.4
2.9
Source: Edelweiss research
72 Edelweiss Securities Limited Mahindra & Mahindra Ltd
Additional Data Directors Data Deepak S. Parekh M M Murugappan A S Ganguly Anupam Puri Dr. Vishakha N. Desai A K Nanda Bharat Doshi Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Other Non‐Executive Directors Executive Directors Nadir B Godrej
Narayanan Vaghul
R K Kulkarni
Arun Kanti Dasgupta
Vikram Singh Mehta
Anand G Mahindra, Chairman and MD
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Executive Directors
Auditors ‐ Deloitte Haskins & Sells *as per last annual report
Holding – Top10
Perc. Holding 11.39
4.41
4.11
2.24
1.66
Prudential mgmt & se Mahindra & mahindra Capital group compan Gic private limited Vanguard group Perc. Holding 8.35
4.38
2.6
2.03
1.62
M & m benefit trust
Commonwealth bank of
Icici prudential lif
Blackrock
Max new york life in
*in last one year
Bulk Deals
Data No Data Available Acquired / Seller B/S
Qty Traded
Price *in last one year Insider Trades
Reporting Data 02 Sep 2016 02 Sep 2016 Acquired / Seller Mrs. Sudha Keshub Mahindra jointly with Mr. Chetan Girish Varde
Mrs. Sudha K Mahindra jointly with Ms. Uma Malhotra
B/S Sell Buy Qty Traded 40000.00
30000.00
*in last one year
73 Edelweiss Securities Limited Automobiles THIS PAGE IS INTENTIONALLY LEFT BLANK 74 Edelweiss Securities Limited COMPANY UPDATE MARUTI SUZUKI INDIA Competition: What’s that?
India Equity Research| Automobiles Maruti Suzuki’s (MSIL) market share march, we believe, will continue unabated led by: a) ~15‐year low competitive intensity; b) higher share of models under waiting list (4 models: >20% of volumes); and c) model launch activity on auto pilot mode. There is further scope for margin expansion with lowering of discounts, benefits of platform consolidation and scale up at its Gujarat plant. In our view, robust FCF generation and strong pre‐tax RoIC of 139% (FY19E) will sustain valuation premium. Auto sector being an early cycle play, we upgrade our target core PE to 27x (21x earlier). Maintain ‘BUY’ with TP of INR8,802 (INR6,928 earlier) Volume drivers: Rising waiting list + structured product pipeline Post recent launch of new Dzire, MSIL now has 4 models with waiting list. This should aid MSIL to either report strong margins or use cash flows to gain market share in other segments – both of which will bolster earnings. Model launch activity is on auto pilot mode (2‐3 launches every year), and should easily achieve MSIL’s 2020 target of 20 new launches/upgrades. MSIL has been able to better adapt to changing consumer preferences with renewed focus on customer segmentation aiding market share gain. Margin tailwinds: Lower discounts and platform consolidation An improved product mix should help drive average discounts lower and boost margins. Even for legacy models, though discounts are currently at elevated levels, we believe they should trend lower as and when the demand environment recovers. As MSIL consolidates its platform (with model upgrades), margin will get additional boost along with scale up of Gujarat plant. . Outlook and valuations: Juggernaut to roll on; maintain ‘BUY’ Long waiting periods for key products, structured product launch pipeline, superior franchise will sustain market share gains. Robust financials (10% FCF to sales and RoE of 23% in FY19E) will help sustain premium valuations. We maintain ‘BUY/SO’ and value the stock at INR8,802 (27x FY19E core EPS – preferred band 20x‐30x, and INR1,353 cash per share). At CMP, the stock trades at FY19E PER of 21x. Financials Year to March Revenues Rev. growth (%) Adjusted Profit Basic shares outstanding (mn) Adjusted diluted EPS (INR) EPS Growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY16 575,381 15.5 53,643 302 177.6 47.3 41.9 23.1 20.0 EDELWEISS 4D RATINGS Absolute Rating BUY
Rating Relative to Sector Outperform
Risk Rating Relative to Sector High
Sector Relative to Market Underweight
MARKET DATA (R: MRTI.BO, B: MSIL IN) CMP : INR 7,434 Target Price : INR 8,802 52‐week range (INR) : 7,500 / 4,130 Share in issue (mn) : 302.1 M cap (INR bn/USD mn) : 2,245 / 34,798 Avg. Daily Vol.BSE/NSE(‘000) : 652.8 SHARE HOLDING PATTERN (%)
Current
Q3FY17 Q2FY17
Promoters * 56.2
56.2 56.2 MF's, FI's & BK’s
12.3
12.4 12.3 FII's
24.6
24.5 25.0 Others
7.0
6.9 6.5 :
* Promoters pledged shares (% of share in issue) NIL
PRICE PERFORMANCE (%)
Stock Nifty EW Auto Index
1 month (0.4) 1.0 (2.2)
3 months 18.6 6.4 7.4 12 months 78.6 17.4 21.6 (INR mn)
FY17
680,348
18.2
73,377
302 243.0
36.8
30.6
19.2
22.2
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. FY18E
793,385
16.6
88,810
302
294.1
21.0
25.3
15.4
22.7
FY19E
916,208
15.5
105,528
302
349.4
18.8
21.3
12.6
23.0
Chirag Shah +91 22 6623 3367 [email protected] Karthik Subramaniam +91 22 6620 3156 [email protected] July 10, 2017 Edelweiss Securities Limited Automobiles 5 30.0 4 20.0 2 10.0 1 0.0 FY12
FY13
FY14
FY15
FY16
FY17
6.0 5.0 (%)
40.0 New models(number)
Volumes share(%)
Chart 1: Higher share of new models to drive down discounts; though like‐to‐like discounts for older models still higher 50.0 6 7.0 4.0 3.0 0 2.0 FY12
New models as % total domestic volumes
Number of new models (RHS)
FY13
FY14
FY15
FY16
Average discounts as % net ASP
Old model discounts as % net ASP
FY17
Note: New models are assumed as models without discounts 100,000 15.0 75,000 11.0 50,000 7.0 25,000 3.0 0 (25,000)
(1.0)
FY12
FY13
FY14
Free cash flow(FCF)
FY15
FY16
FY17 FY18E FY19E
FCF as % revenues(%)
FCF (INRmn)
Table 1: Success of new launches has been highest during past 3 years Year of Launch
Model Category
Success/Failure
Comments
FY06
Swift
Mid
Success
Differentiated product
FY07
Estilo
Entry
Failure
Lack of differentiation and higher pricing
FY08
SX4
Executive
Failure
FY08
Dzire
Mid
Success
Differentiated product
FY09
A‐Star
Entry
Failure
FY10
Ritz
Mid
Failure
FY11
Kizashi
Executive
Failure
Expensive offering
FY12
Ertiga
Mid
Success
Differentiated product in MPV category
FY14
Celerio
Entry
Success
Demand for AMT variant the key driver
FY15
Ciaz
Executive
Success
Demand for diesel hybrid variant the key driver
FY16
Baleno
Mid
Success
Strong response with high waiting periods
FY16
S‐Cross
Executive
Failure
High pricing for 1.6L variant
Strong response with high waiting periods
FY17
Brezza
Executive
Success
Chart 2: FCF generation to remain robust (5.0)
FCF as % revenues(RHS)
Source: Company, Edelweiss research 76 Edelweiss Securities Limited Maruti Suzuki India Ltd
Table 2: Valuations FY19E
276
27
7,450
1,353
8,802 Core EPS (INR)
Earnings multiple (x)
Value per share (INR)
Cash per share (INR)
Target price (INR)
Source: Edelweiss research 77 Edelweiss Securities Limited Automobiles Company Description Maruti Suzuki (MSIL) is India’s largest passenger vehicle (PV) manufacturer with ~47.4% market share. The company is a key player in the mini and compact cars segment with dominant market share and has enjoyed success in the executive segment as well post launch of Ciaz and Brezza. Suzuki Motor Corporation (Suzuki) of Japan holds 56% stake in the company. MSIL offers the widest product range in passenger cars with special focus on compact car segment. Investment Theme MSIL remains well placed to sustain market share gains given its robust new model launch pipeline, relatively weak competitive intensity, expanding distribution and consumer shift to petrol models (stronghold for MSIL). Improved product mix (higher share of Baleno/Brezza/Ignis/new Dzire) should help boost realisations and margins by lowering average discounts. We believe the long waiting period for key models, superior franchise and robust free cash flow generations will help sustain premium valuations. Key Risks Capacity constraints: MSIL’s capacity addition program is fairly structured with ~250K blocks. Currently, MSIL is in a sweet spot due to waiting period for many of its existing models and structured product cycle. This makes us believe that MSIL will face capacity constraints in case of sharp demand recovery Larger engine offerings: MSIL has yet to demonstrate its success with higher CC engines (upwards of 1.6 litres). With expansion of executive segment, we believe it become imperative for MSIL to address the product portfolio gap. 78 Edelweiss Securities Limited Maruti Suzuki India
Financial Statements Key Assumptions Year to March FY16 FY17 GDP(Y‐o‐Y %) Inflation (Avg) 7.2 4.9 6.5 4.8 7.1
5.0
7.7
5.2
Repo rate (exit rate) 6.8 6.3 6.3
6.3
65.0 67.5 67.0
67.0
Macro USD/INR (Avg) Sector FY18E
FY19E
Income statement
Year to March
FY16 FY17
FY18E
FY19E
575,381 680,348
386,974 467,316
793,385
545,482
916,208
633,607
107,341
Income from operations
Materials costs
Manufacturing expenses
79,775 86,192
95,919
Employee costs
19,788 23,310
27,388
29,752
486,537 576,818
668,789
770,700
EBITDA
88,844 103,530
124,596
145,507
Depreciation
28,202 26,021
27,025
28,884
EBIT
60,642 77,509
97,572
116,623
Total operating expenses
Cars ‐ domestic vol. (% YoY) 8.0 4.0 8.0
8.0
UV ‐ domestic vol. (% YoY) 6.3 37.0 20.0
15.0
Company Add: Other income
Revenue assumptions Less: Interest Expense
11.5 10.7 13.7
13.3
1.8 0.1 10.0
8.0
393,857 418,743 432,422
439,269
Volume growth (% YoY) Cars ‐ domestic vol. (% YoY) Exports Avg realisation (INR) Avg realisation (% YoY) Price hike Cost assumptions RM cost/vehicle Employee cost/vehicle (INR mn)
14,610.00 22,798.00 24,002.52 27,753.96
815 894
894
894
Profit Before Tax
74,437 99,413
120,680
143,483
Less: Provision for Tax
20,794 26,036
31,870
37,955
Reported Profit
53,643 73,377
88,810
105,528
Adjusted Profit
53,643 73,377
88,810
105,528
302 302
302
302
177.6 243.0
294.1
349.4
3.5 6.3 3.3
1.6
Shares o /s (mn)
(2.0) 1.0 1.0
1.0
Adjusted Basic EPS
270,754 297,919 306,536
315,338
Diluted shares o/s (mn)
302 302
302
302
Adjusted Diluted EPS
177.6 243.0
294.1
349.4
Adjusted Cash EPS
13,845 14,860 15,391
14,807
271.0 329.1
383.6
445.1
Royalty (% sales) 5.6 5.7 5.5
5.0
Dividend per share (DPS)
25.0 75.0
80.0
85.0
Promotion cost (% revenue) 2.1 2.0 2.0
1.9
Dividend Payout Ratio(%)
16.9 37.2
32.7
29.3
62,161 66,001 70,017
72,417
EBITDA/vehicle Financial assumptions 9.7 8.0 7.5
7.4
Tax rate (%) 27.6 27.0 27.0
27.0
Dividend payout (%) 16.9 37.2 32.7
29.3
Currency (JPY/INR) 0.5 0.6 0.6
0.6
Depreciation rate (%) B/S assumptions (1,028) 4,062 (4,062)
‐
Capex (INR mn) 18,138 36,267 35,000
30,000
8 7 6
6
Inventory days 22 21 20
20
Payable days 51 52 52
52
(21) (24) (25)
(25)
Cash conversion cycle Common size metrics
Year to March
FY16 FY17
FY18E
FY19E
Operating expenses
Materials costs
84.6 67.3 84.8
68.7
84.3
68.8
84.1
69.2
Staff costs
3.4 3.4
3.5
3.2
13.9 12.7
12.1
11.7
Depreciation
4.9 3.8
3.4
3.2
Interest Expense
0.1 0.1
0.1
0.1
EBITDA margins
15.4 15.2
15.7
15.9
9.3 10.8
11.2
11.5
S G & A expenses
Net borrowings (INR mn) Debtor days Net Profit margins
Growth ratios (%)
Year to March
FY16 FY17
FY18E
FY19E
Revenues
EBITDA
15.5 36.7 18.2
16.5
16.6
20.3
15.5
16.8
PBT
55.1 33.6
21.4
18.9
Adjusted Profit
47.3 36.8
21.0
18.8
EPS
47.3 36.8
21.0
18.8
79 Edelweiss Securities Limited Automobiles Balance sheet As on 31st March FY16 FY17 (INR mn)
Cash flow metrics
FY16 FY18E
FY19E
FY17
FY18E
FY19E
Share capital Reserves & Surplus 1,510 1,510 1,510
297,332 360,201 419,931
1,510
494,561
Operating cash flow
Investing cash flow
84,331 91,251
(71,759) (86,868)
106,559
(70,466)
120,976
(78,746)
Shareholders' funds 298,842 361,711 421,441
496,071
Financing cash flow
(12,364) (24,095)
(34,036)
(31,792)
208 (19,712)
2,056
10,438
(18,138) (36,267)
(35,000)
(30,000)
29,080
30,898
Year to March
Short term borrowings 774 4,836 774
774
Net cash Flow
Total Borrowings 774 4,836 774
774
Capex
1,943 4,640 Def. Tax Liability (net) 4,640
4,640
Sources of funds 301,559 371,187 426,855
501,485
Gross Block Net Block 291,514 325,327 360,327
125,100 132,892 140,867
390,327
141,983
Capital work in progress 10,069 12,523 Dividend paid
9,090 27,263
Profitability and efficiency ratios
Year to March
FY16 FY17
FY18E
FY19E
20.0 28.0 22.2
30.1
22.7
30.8
23.0
31.4
20
12,523
12,523
Total Fixed Assets 135,169 145,415 153,390
154,506
ROAE (%)
ROACE (%)
Cash and Equivalents 189,380 262,519 324,044
410,982
Inventory Days
22 21
20
Inventories 31,321 32,622 38,213
43,864
Debtors Days
8 7
6
6
Sundry Debtors 13,222 11,992 14,047
16,125
Payable Days
51 52
52
52
31 25 29
34
(21) (24)
(25)
(25)
Other Current Assets 42,202 46,310 46,310
46,310
2.5 2.8
2.8
3.0
Current Assets (ex cash) 86,776 90,949 98,599
106,332
Gross Debt/EBITDA
‐ ‐
‐
‐
Trade payable 74,073 83,673 97,750
111,612
Gross Debt/Equity
‐ ‐
‐
‐
Other Current Liab 35,693 44,023 51,429
58,723
Adjusted Debt/Equity
‐ ‐
‐
‐
Total Current Liab 109,766 127,696 149,179
170,335
Net Debt/Equity
(0.6) (0.7)
(0.8)
(0.8)
Net Curr Assets‐ex cash (22,990) (36,747) (50,580)
(64,003)
Interest Coverage Ratio
74.4 86.7
109.1
130.5
Uses of funds 301,559 371,187 426,855
501,485
Loans & Advances BVPS (INR) Free cash flow 989.5 1,197.7 1,395.5
Year to March FY16 FY17 FY18E
FY19E
53,643 28,202 73,377 26,021 88,810
27,025
105,528
28,884
Reported Profit Add: Depreciation Interest (Net of Tax) 1,642.6
(INR mn)
590 660 658
658
Others (1,204) 4,950 3,899
(670)
Less: Changes in WC (3,100) 13,757 13,833
13,424
Operating cash flow 84,331 91,251 106,559
120,976
Cash Conversion Cycle
Current Ratio
Operating ratios
Year to March
FY16 FY17
FY18E
FY19E
Total Asset Turnover
Fixed Asset Turnover
2.1 4.6 2.0
5.3
2.0
5.8
2.0
6.5
Equity Turnover
2.1 2.1
2.0
2.0
Valuation parameters
Year to March
FY16 FY17
FY18E
FY19E
Adj. Diluted EPS (INR)
Y‐o‐Y growth (%)
177.6 47.3 243.0
36.8
294.1
21.0
349.4
18.8
271.0 329.1
383.6
445.1
41.9 30.6
25.3
21.3
P/B (x)
7.5 6.2
5.3
4.5
EV / Sales (x)
3.6 2.9
2.4
2.0
23.1 0.3 19.2
1.0
15.4
1.1
12.6
1.1
Less: Capex 18,138 36,267 35,000
30,000
Adjusted Cash EPS (INR)
Free Cash Flow 66,193 54,984 71,559
90,976
Diluted P/E (x)
EV / EBITDA (x)
Dividend Yield (%)
Peer comparison valuation Market cap
Name Diluted P/E (X)
EV / EBITDA (X)
P/B (X)
(USD mn)
FY18E
FY19E
FY18E
FY19E FY18E
FY19E
Maruti Suzuki India Ltd 34,278
25.0
21.0
15.2
12.4 5.3
4.5
Mahindra & Mahindra Ltd 13,096
19.2
16.9
12.1
10.5 2.9
2.5
Tata Motors Ltd 21,256
10.8
8.8
4.0
3.5 2.0
1.7
Median ‐
19.2
16.9
12.1
10.5 2.9
2.5
AVERAGE ‐
18.3
15.6
10.5
8.8 3.4
2.9
Source: Edelweiss research
80 Edelweiss Securities Limited Maruti Suzuki India
Additional Data Directors Data Amal Ganguli Manvinder Singh Banga R C Bhargava, Chairman Kenichi Ayukawa Tsuneo Ohashi Keiichi Asai Non‐Executive Independent Directors
Non‐Executive Independent Directors
Other Non‐Executive Directors
Other Non‐Executive Directors
Executive Directors Executive Directors Pallavi Shroff
Davinder Singh Brar
Osamu Suzuki
Shinzo Nakanishi, MD and CEO
Shuji Oishi
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Other Non‐Executive Directors
Executive Directors Executive Directors Auditors ‐ Price Waterhouse *as per last annual report
Holding – Top10
Perc. Holding 56.21
1.43
1.22
0.78
0.75
Suzuki motor corp Blackrock Vanguard group Birla sun life asset Jpmorgan chase & co Life insurance corp
Hdfc asset managemen
Abu dhabi investment
Fmr llc
Uti asset management
Perc. Holding 5.3
1.28
1.06
0.78
0.69
*in last one year
Bulk Deals
Data No Data Available Acquired / Seller B/S
Qty Traded
Price *in last one year Insider Trades
Reporting Data No Data Available Acquired / Seller B/S Qty Traded *in last one year
81 Edelweiss Securities Limited Automobiles THIS PAGE IS INTENTIONALLY LEFT BLANK 82 Edelweiss Securities Limited COMPANY UPDATE TATA MOTORS
It’s all about expectations India Equity Research| Automobiles We perceive headwinds for Tata Motors’ (TTMT) domestic business due to: (1) humungous INR40bn per annum capex; and (2) market share gain challenges. Ergo, we expect free cash flow to remain under pressure. Though JLR’s volume momentum is healthy, margin headwinds persist (versus Street’s expectation) as: (a) unlike past, new launches will not be meaningful revenue contributors; (b) aging portfolio; and (c) high competitive intensity. Maintain ‘HOLD’. Domestic business: Rising capex intensity to squeeze free cash flow TTMT has earmarked INR40bn (CV: INR15bn, cars: INR25bn) capex per annum for FY18/19. The spend in CV business is to refurbish the product portfolio with an eye on regaining market share (loss of ~570bps in past 3 years). However, it appears little too late as competition has already created its brand presence, making it all the more difficult for TTMT to sustainably regain lost ground. The car business is in capex mode in preparation of new platform launch in 2019. Overall, we expect free cash flow to stay under pressure over the medium term. HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector High
Sector Relative to Market Underweight
MARKET DATA (R: TAMO.BO, B: TTMT IN) CMP : INR 447 Target Price : INR 495 52‐week range (INR) : 598 / 417 Share in issue (mn) : 2,887.3 M cap (INR bn/USD mn) : 1,290 / 19,986 Avg. Daily Vol.BSE/NSE(‘000) : 7,762.7 SHARE HOLDING PATTERN (%)
Current
Q3FY17 Q2FY17
34.7
34.7 33.0 JLR: Product pipeline robust, but margin headwinds persist MF's, FI's & BK’s
15.5
14.8 14.5 We believe, new launches Discovery, Velar and I‐pace will propel JLR’s volume momentum. However, average discounts are poised to inch up as: (1) unlike past, new launches are unlikely to be significant revenue contributors; and (2) ageing product portfolio generally entails higher variable marketing spend. For instance, Range Rover and Range Rover Sport are in fourth and fifth years of life cycles, respectively; Discovery Sport is entering third year and should see higher discounts going ahead. FII's
23.2
24.2 26.1 Others
26.6
26.2 26.4 Financials Basic shares outstanding (mn) Adjusted diluted EPS (INR) EPS Growth (%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY16 2,730,456 3.9 144,504 3,396 42.5 4.2 10.5 4.5 21.4 FY17E
2,696,925
(1.2)
94,994
3,397 28.0
(34.3)
16.0
5.7
13.9
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. :
* Promoters pledged shares (% of share in issue) 8.9
PRICE PERFORMANCE (%)
Stock While JLR’s product pipeline remains robust, we believe EBIT growth will trail Street’s expectation, thereby affecting estimated free cash flow. We envisage M&HCV market share gains to remain challenging. Hence, we maintain ‘HOLD/SU’ with TP of INR495 (JLR valued at 5.5x FY19E EBIT and standalone at 8x FY19E EV/EBITDA). At CMP, the stock trades atFY19E PER of 9x
Year to March Revenues Rev. growth (%) Adjusted Profit Absolute Rating Promoters * Outlook and valuations: Fairly priced; maintain ‘HOLD’ EDELWEISS 4D RATINGS Nifty EW Auto
Index 1 month (4.4) 1.0 3 months (5.9) 6.4 (2.2)
7.4 12 months (4.2) 17.4 21.6 (INR mn)
FY18E
2,944,745
9.2
135,502
3,396
39.9
42.7
11.2
4.7
20.6
FY19E
3,293,976
11.9
165,961
3,396
48.9
22.5
9.1
4.0
20.5
Chirag Shah +91 22 6623 3367 [email protected] Karthik Subramaniam +91 22 6620 3156 [email protected] July 10, 2017 Edelweiss Securities Limited Automobiles Chart 2: High capex to put domestic FCF under stress 75.0 0 FCF (INRmn)
Market share (%)
60.0 45.0 30.0 0.0 (12,000)
(3.0)
(24,000)
(6.0)
(36,000)
(9.0)
(48,000)
(12.0)
(60,000)
(15.0)
FCF as % revenue(%)
Chart 1: CV & PV market share remain under pressure M&HCV
PV
LCV
TTMT standalone FCF
FY19E
FY18E
FY17
FY16
FY15
FY11 FY12 FY13 FY14 FY15 FY16 FY17
FY14
0.0 FY13
15.0 FCF as % revenues (RHS)
Chart 3: Though JLR revenue has outperformed… 15.0 Chart 4: … EBIT performance has lagged global peers 10.0 5.0 EBIT CAGR (%)
Revenue CAGR (%)
11.0 7.0 3.0 (1.0)
(5.0)
0.0 (5.0)
(10.0)
Daimler
BMW
VW
(15.0)
JLR
Revenue CAGR FY13‐17
Daimler
BMW
VW
JLR
EBIT CAGR FY13‐17
5.0 Chart 6: JLR’s EBITDA per vehicle trend 10,000 EBITDA per unit (GBP)
Value weighted age (years)
Chart 5: Marketing spends to remain high given aging portfolio 6.0 4.0 3.0 2.0 9,000 8,000 7,000 6,000 5,000 1.0 FY14
Jaguar
FY15
FY16
FY17
Land Rover
FY18E FY19E
Total JLR
FY14
FY15
FY16
FY17
FY18E FY19E
JLR EBITDA per vehicle
Source: Company, Bloomberg, Edelweiss research 84 Edelweiss Securities Limited Tata Motors
Table 1: SOTP valuation Financials (INR mn)
A. Standalone
EBITDA (Rs mn)
Target multiple (x)
Enterprise Value (Rs mn)
Per Share value (Rs)
B. JLR
EBIT (Rs mn)
Target multiple EV/EBIT (x)
Enterprise Value (Rs mn)
Per Share value (Rs)
EBITDA (Rs mn)
Implied EV/EBITDA (x)
C. Finance Sub TMFL
Net worth FY16 (Rs mn)
P/BV (x)
Value (Rs mn)
Per Share (Rs)
D. Subs (Rs mn)
PAT FY16
TDCV
2,576
Tata Tech
3,817
Tata Driveline
548
Total
Per Share (Rs)
E. Net Debt
Less: Automotive debt (Rs mn)
Per Share (Rs)
Total Target Price (A+B+C+D‐E)
FY19E
30,970
8.0
247,759
73
239,745
5.5
1,318,595
388
432,609
3.0
Multiple (x)
Value
8 20,608
10 38,170
8 4,384
36,000
1.5
54,000
16
TAMO's share
20,608
31,128
3,726
55,462
16
(6,202)
(2)
495 Source: Edelweiss research 85 Edelweiss Securities Limited Automobiles Company Description TTMT is India's largest commercial vehicle player and fourth largest player in the PV market with products in compact and mid size cars and utility vehicle segments. Through subsidiaries and associate companies, the company has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, the business comprising 2 iconic British brands – Jaguar and Land Rover. TTMT’s cars, buses and trucks are being marketed in several countries across Europe, Africa, the Middle East, South Asia, South East Asia and South America. Investment Theme We remain positive on JLR’s healthy product pipeline and believe platform consolidation will accelerate model introductions over next 5 years. However, increasing average portfolio age for JLR and higher discounting are likely to cap margin expansion. We expect FCF generation of domestic business to remain under pressure given huge capex and continued pressure on market share. Key Risks Domestic business: In PV business, TTMT continues to invest in a new platform due to for launch in 2019. Success of this platform is a key monitorable. In its commercial vehicle business, the company is unable to stem the loss of market share, despite having a wide distribution network and strong brand equity. This is likely to put pressure on its margin profile over long term driven by higher support activities. Jaguar and Land Rover: Given competitive intensity, we expect profitability to lag volume growth. Electric vehicles remain a key event as it is unclear as of now the extent of success all the traditional players are likely to achieve. 86 Edelweiss Securities Limited Tata Motors
Financial Statements Key Assumptions Year to March FY16 FY17 GDP(Y‐o‐Y %) Inflation (Avg) 7.2 4.9 6.5 4.8 7.1
5.0
7.7
5.2
Repo rate (exit rate) 6.8 6.3 6.3
6.3
65.0 67.5 67.0
67.0
Cars ‐ domestic vol. (% YoY) 8.0 4.0 8.0
8.0
Total operating expenses
MHCV ‐ domestic vol (% YoY) 30.0 1.0 8.0
8.0
EBITDA
383,075 334,988
397,543
444,509
Depreciation
167,108 179,050
206,311
221,504
EBIT
215,967 155,938
191,232
223,005
Add: Other income
8,853.5 7,545.4 8,846.12 9,611.87
48,891 Macro USD/INR (Avg) Sector Company Revenue assumptions FY18E
FY19E
Income statement
Year to March
FY16 FY17
Income from operations
Materials costs
Manufacturing expenses
(INR mn)
FY18E
FY19E
2,730,456 2,696,925 2,944,745 3,293,976
1,633,830 1,658,942 1,820,688 2,052,430
18,095
18,461
20,547
Employee costs
288,809 283,329
11,107 278,938
305,500
Total SG&A expenses
580,418 570,341
604,186
655,599
Expenses capitalised
166,783 168,770
175,071
184,609
2,347,381 2,361,937 2,547,202 2,849,467
Domestic vol growth (% YoY) Cars ‐ domestic vol. (% YoY) (2.5) 26.4 10.9
9.1
Less: Interest Expense
42,380
37,599
MHCV ‐ domestic vol (% YoY) 23.4 (5.0) 5.2
6.5
Add: Exceptional items
(34,672) (27,955)
‐
‐
LCV ‐ dom. vol. (% YoY) (9.9) 5.5 2.5
10.2
Profit Before Tax
141,258 93,148
162,479
200,219
Less: Provision for Tax
30,251 32,512
42,206
56,017
Less: Minority Interest
989 1,022
‐
‐
Associate profit share
5,775 14,930
15,230
21,758
165,961
Domestic avg. realisation (INR) Domestic avg. realisation (% YoY) JLR sales volume (Nos) 839,373.2 818,038.0 774,635.3 774,205.0
16.3 (2.5) (5.3)
(0.1)
32,398
Jaguar 102,107 169,284 178,170
190,877
Reported Profit
115,793 74,544
135,502
Land Rover 407,228 373,509 407,914
450,294
Exceptional Items
(28,711) (20,450)
‐
‐
Adjusted Profit
144,504 94,994
135,502
165,961
3,396 3,397
3,396
3,396
42.5 28.0
39.9
48.9
3,396 3,397
3,396
3,396
Adjusted Diluted EPS
42.5 28.0
39.9
48.9
Adjusted Cash EPS
91.8 80.7
100.7
114.1
Dividend per share (DPS)
‐ ‐
1.2
1.2
Dividend Payout Ratio(%)
‐ ‐
3.4
2.8
Cost assumptions RM cost/vehicle Employee cost/vehicle Average salary Promotion cost (% revenue) EBITDA/vehicle Financial assumptions Avg. Interest rate (%) Depreciation rate (%) Tax rate (%) Dividend payout (%) B/S assumptions Net borrowings (INR mn) Capex (INR mn) Debtor days Inventory days Payable days Cash conversion cycle 570,274 578,050 539,241
59,296 65,273 68,026
529,935
68,257
1,081,098 1,237,857 1,361,643 1,470,574
1.6 1.7 1.6
1.4
57,725 22,979 31,956
48,733
11.0
8.0
11.8 13.5 9.0 8.1 8.5
8.1
17.2 26.8 26.0
28.0
‐ ‐ 3.4
2.8
Shares o /s (mn)
Adjusted Basic EPS
Diluted shares o/s (mn)
Common size metrics
Year to March
FY16 FY17
FY18E
FY19E
86.0 59.8 87.6
61.5
86.5
61.8
86.5
62.3
(116,492) 125,280 (20,000)
(20,000)
Operating expenses
Materials costs
328,563 317,837 308,700
312,900
17 19 17
Staff costs
10.6 10.5
9.5
9.3
16
S G & A expenses
15.1 14.9
14.6
14.3
Depreciation
6.1 6.6
7.0
6.7
Interest Expense
1.8 1.6
1.3
1.0
EBITDA margins
14.0 12.4
13.5
13.5
5.3 3.6
4.6
5.0
69 74 69
64
215 253 235
202
(128) (160) (149)
(122)
Net Profit margins
Growth ratios (%)
Year to March
FY16 FY17
FY18E
FY19E
Revenues
EBITDA
3.9 (2.5) (1.2)
(12.6)
9.2
18.7
11.9
11.8
(30.2) (34.1)
74.4
23.2
10.0 (34.3)
42.6
22.5
4.2 (34.3)
42.7
22.5
PBT
Adjusted Profit
EPS
87 Edelweiss Securities Limited Automobiles Balance sheet As on 31st March FY16 FY17 (INR mn)
Cash flow metrics
Year to March
FY16 FY17
FY18E
FY19E
Share capital Reserves & Surplus 6,792 6,794 6,792
782,732 573,827 716,757
6,792
878,146
Operating cash flow
Investing cash flow
Shareholders' funds 789,525 580,620 723,549
884,938
Financing cash flow
(31,930) 82,901
(62,172)
(56,970)
Net cash Flow
(26,371) 139,699
24,411
93,435
Minority Interest 4,328 4,532 4,532
4,532
Short term borrowings 114,508 138,599 138,599
138,599
Capex
Long term borrowings 505,104 606,292 586,292
566,292
Dividend paid
Total Borrowings 619,612 744,891 724,891
704,891
FY18E
FY19E
391,667 332,798 386,437 453,693
(386,108) (276,001) (299,854) (303,288)
(328,563) (317,837) (308,700) (312,900)
(29) ‐
(4,572)
(4,572)
Profitability and efficiency ratios
Sources of funds 1,458,213 1,341,782 1,464,711 1,606,100
Year to March
FY16 FY17
FY18E
FY19E
Gross Block Net Block 2,133,869 2,265,347 2,574,047 2,886,947
713,097 669,392 744,573 791,183
ROAE (%)
ROACE (%)
21.4 16.6 13.9
11.9
20.6
14.4
20.5
15.3
64
Def. Tax Liability (net) 44,748 Capital work in progress Intangible Assets Total Fixed Assets 11,739 11,739
11,739
65,510 101,868 101,868
101,868
Inventory Days
69 74
69
552,900 525,169 564,377
609,163
Debtors Days
17 19
17
16
1,331,507 1,296,430 1,410,818 1,502,214
Payable Days
215 253
235
202
Cash and Equivalents 409,206 343,247 367,658
461,093
Cash Conversion Cycle
(128) (160)
(149)
(122)
Inventories 326,557 350,853 342,672
383,718
Current Ratio
1.1 1.0
1.0
1.1
Sundry Debtors 135,709 140,756 136,939
153,364
Gross Debt/EBITDA
1.6 2.2
1.8
1.6
Loans & Advances 468,432 606,259 540,258
519,276
Gross Debt/Equity
0.8 1.3
1.0
0.8
Current Assets (ex cash) 930,698 1,097,868 1,019,870 1,056,358
Adjusted Debt/Equity
0.8 1.3
1.0
0.8
Net Debt/Equity
0.3 0.7
0.5
0.3
Interest Coverage Ratio
4.4 3.7
5.1
6.9
Trade payable 1,075,844 1,247,640 1,119,123 1,172,793
Other Current Liab 137,355 148,122 214,513
240,772
Total Current Liab 1,213,200 1,395,762 1,333,635 1,413,565
Net Curr Assets‐ex cash (282,501) (297,894) (313,765) (357,207)
Operating ratios
Uses of funds 1,458,213 1,341,782 1,464,711 1,606,100
Year to March
FY16 FY17
FY18E
FY19E
2.0 2.5 1.9
2.2
2.1
2.4
2.1
2.4
Equity Turnover
4.0 3.9
4.5
4.1
FY16 FY17
FY18E
FY19E
42.5 4.2 28.0
(34.3)
39.9
42.7
48.9
22.5
232.5 170.9 213.1
Year to March FY16 FY17 FY18E
FY19E
115,793 74,544 135,502
167,108 179,050 206,311
165,961
221,504
Valuation parameters
Year to March
Reported Profit Add: Depreciation (INR mn)
Total Asset Turnover
Fixed Asset Turnover
BVPS (INR) Free cash flow 260.6
Interest (Net of Tax) 40,484 31,002 27,832
23,334
Others (8,131) 63,595 32,662
86,337
Adj. Diluted EPS (INR)
Y‐o‐Y growth (%)
Less: Changes in WC (76,413) 15,393 15,871
43,442
Adjusted Cash EPS (INR)
91.8 80.7
100.7
114.1
Operating cash flow 391,667 332,798 386,437
453,693
Diluted P/E (x)
10.5 16.0
11.2
9.1
Less: Capex 328,563 317,837 308,700
312,900
P/B (x)
1.9 2.6
2.1
1.7
140,793
EV / Sales (x)
0.6 0.7
0.6
0.5
EV / EBITDA (x)
Dividend Yield (%)
4.5 ‐ 5.7
‐
4.7
0.3
4.0
0.3
Free Cash Flow 63,104 14,962 77,737
Peer comparison valuation Market cap
Name Diluted P/E (X)
EV / EBITDA (X)
P/B (X)
(USD mn)
FY18E
FY19E
FY18E
FY19E FY18E
FY19E
21,256
10.8
8.8
4.6
3.8 2.0
1.7
4,529
19.6
15.1
10.8
8.3 5.0
4.3
13,096
19.2
16.9
12.1
10.5 2.9
2.5
Median ‐
19.2
15.1
10.8
8.3 2.9
2.5
AVERAGE ‐
16.5
13.6
9.2
7.5 3.3
2.8
Tata Motors Ltd Ashok Leyland Mahindra & Mahindra Ltd Source: Edelweiss research
88 Edelweiss Securities Limited Tata Motors
Additional Data Directors Data N N Wadia S Bhargava V K Jairath Cyrus P Mistry Ravindra Pisharody Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Chiarman, Non‐Executive Director
Executive Directors R A Mashelkar
N Munjee
R Sen
Ralf Speth
Satish Borwankar
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Non‐Executive Independent Directors
Other Non‐Executive Directors
Executive Directors Auditors ‐ Deloitte Haskins & Sells *as per last annual report
Holding – Top10
Perc. Holding 31.6
5.18
2.2
1.59
1.22
Tata sons ltd Life insurance corp Blackrock Gic private limited Vanguard group Perc. Holding 18.37
2.5
1.61
1.26
1.18
Citibank na
Tata industries ltd
Icici prudential lif
Icici prudential ass
Abu dhabi investment
*in last one year
Bulk Deals
Data 13 Dec 2016 Acquired / Seller Tata Sons Ltd B/S Buy
Qty Traded 50000000
Price 486.13
*in last one year
Insider Trades
Reporting Data 19 Dec 2016 22 Sep 2016 Acquired / Seller Tata sons Ltd
Tata sons Ltd
B/S Buy
Sell
Qty Traded 50000000.00 2105773.00 *in last one year
89 Edelweiss Securities Limited RATING & INTERPRETATION
Company Absolute Relative
Relative
reco reco Risk Ashok Leyland BUY SO H L Ceat Ltd BUY SO L SO M Exide Industries BUY SP L HOLD SU H Mahindra & Mahindra Ltd BUY SO M BUY SO H Minda Corporation BUY SO M Motherson Sumi Systems HOLD SU H Suprajit Engineering BUY SO H Tata Motors Ltd HOLD SP H Amara Raja Batteries Bajaj Auto Eicher Motors Hero MotoCorp Maruti Suzuki India Ltd Absolute Relative
Relative
reco
reco
risk BUY None None HOLD SU BUY Company
ABSOLUTE RATING Ratings
Expected absolute returns over 12 months
Buy
More than 15%
Hold
Between 15% and - 5%
Reduce
Less than -5%
RELATIVE RETURNS RATING Ratings
Criteria
Sector Outperformer (SO)
Stock return > 1.25 x Sector return
Sector Performer (SP)
Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU)
Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings
Criteria
Low (L)
Bottom 1/3rd percentile in the sector
Medium (M)
Middle 1/3rd percentile in the sector
High (H)
Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING Ratings
Criteria
Overweight (OW)
Sector return > 1.25 x Nifty return
Equalweight (EW)
Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW)
Sector return < 0.75 x Nifty return
90 Edelweiss Securities Limited Tata Motors
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: [email protected]
ADITYA
NARAIN
Aditya Narain Head of Research [email protected] Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990f
20bf0213f69235fc3f1bcd0fa1c30092792c20,
postalCode=400005,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c
89e548e5001b4f8141cf423fd58c07b02,
st=Maharashtra
Date: 2017.07.11 13:01:24 +05'30'
Coverage group(s) of stocks by primary analyst(s): Ashok Leyland, Amara Raja Batteries, Bajaj Auto, Ceat Ltd, Eicher Motors, Exide Industries, Hero MotoCorp, Minda Corporation, Mahindra & Mahindra Ltd, Maruti Suzuki India Ltd, Motherson Sumi Systems, Suprajit Engineering, Tata Motors Ltd Recent Research Date Company
09‐Jun‐17 02‐Jun‐17 Ceat
Title
Price (INR)
Margin drag in near term; outlook sanguine; Visit Note Recos
1,908
Buy
1,361
Buy
Automobiles Speeds & Bumps: Getting on the growth highway; Sector Update 30‐May‐17 Mahindra & Packing a potent punch; Mahindra Result Update Distribution of Ratings / Market Cap Rating Interpretation Edelweiss Research Coverage Universe Buy Hold Rating Distribution* * 1stocks under review 161 67 Market Cap (INR) > 50bn 156 Reduce
Total
11 240
Between 10bn and 50 bn < 10bn
62 91 11
Rating
Expected to
Buy appreciate more than 15% over a 12‐month period Hold appreciate up to 15% over a 12‐month period Reduce
depreciate more than 5% over a 12‐month period
Edelweiss Securities Limited Tata Motors
92 Jul‐17
Jun‐17
May‐17
Apr‐17
Mar‐17
Feb‐17
Jan‐17
Dec‐16
Nov‐16
Nov‐16
Oct‐16
Sep‐16
Aug‐16
Jul‐16
(INR)
Mahindra & Mahindra
1,400
8,000
1,800
7,000
1,600
6,000
Jul‐17
3,000
Jul‐17
1,000
Jun‐17
4,000
Jun‐17
1,200
May‐17
5,000
May‐17
Apr‐17
Hero MotoCorp
Apr‐17
2,500
Mar‐17
15,000
Mar‐17
3,000
Feb‐17
19,000
Feb‐17
23,000
Jan‐17
4,000
Jan‐17
27,000
Dec‐16
4,500
Dec‐16
31,000
Nov‐16
Nov‐16
5,000
Nov‐16
Maruti Suzuki India
700
600
500
400
300
200
Edelweiss Securities Limited Jul‐17
Jun‐17
May‐17
Apr‐17
Mar‐17
Feb‐17
Jan‐17
Dec‐16
Nov‐16
Nov‐16
2,000
Nov‐16
70
Oct‐16
2,300
Oct‐16
80
Oct‐16
90
Sep‐16
2,900
Sep‐16
100
Aug‐16
3,200
Aug‐16
Jul‐16
110
(INR)
3,500
Sep‐16
Eicher Motors
Jul‐16
35,000
(INR)
Jul‐17
Jun‐17
May‐17
Apr‐17
Mar‐17
Feb‐17
Jan‐17
Dec‐16
Nov‐16
Nov‐16
Oct‐16
Sep‐16
Aug‐16
Jul‐16
(INR)
120
Aug‐16
2,000
(INR)
Jul‐17
Jun‐17
May‐17
Apr‐17
Mar‐17
Feb‐17
Jan‐17
Dec‐16
Nov‐16
Nov‐16
Oct‐16
Sep‐16
Aug‐16
Jul‐16
(INR)
Ashok Leyland
Jul‐16
Jul‐17
Jun‐17
May‐17
Apr‐17
Mar‐17
Feb‐17
Jan‐17
Dec‐16
Nov‐16
Nov‐16
Oct‐16
Sep‐16
Aug‐16
Jul‐16
(INR)
Automobiles One year price chart 2,600
Bajaj Auto
3,500
Tata Motors
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94 Edelweiss Securities Limited Tata Motors
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